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Avaya's Six Billion Dollar Plan

Remember the TV show "The "Six Million Dollar Man"? It started with intelligence director Oscar Goldman talking about how a $6 million investment could make former astronaut Steve Austin "better" than he had been before being crippled -- better, strong, faster. Avaya is going through something similar, except we can plunk three more zeros onto the price tag.

Avaya needs to be better, stronger, and faster for sure, but it couldn't do that with $6 billion in debt hanging over its head, as previously discussed on No Jitter. So for the past several months, the company has been trying to sell off different business units to pay off at least part of the debt. As No Jitter Editor Beth Schultz pointed out in yesterday's news post, the company has $600 million in debt due this October. While it might have been able to hold off bankruptcy until at least 2018 when more would come due, it opted to go into Chapter 11 now.

So what happened? Why wasn't Avaya able to get some company to bite on the networking or the contact center businesses? Both are valuable assets, yet Avaya couldn't come to an agreement with any buyer.

Staving Off a Fire Sale
As most people know, I'm not a contact center expert, so I let others speak to that space (see "Avaya Keeps Crown Jewel, Contact Center," today's No Jitter post from one such expert, Sheila McGee-Smith, of McGee-Smith Analytics). But I do closely follow the network business, and I know a number of companies had been interested in that asset. Slowly the buyers backed out.

Frankly, the biggest barrier to taking the business unit fell to a people issue related to pension liabilities. The networking business would have come with about 600 employees, many of whom have pensions or contracts. The cost of rationalizing down the employee base would have been prohibitively high for a buyer, and so the only offers Avaya received were far below market price. I'm glad to see Avaya decided to keep the company intact instead of giving away valuable assets in a fire sale.

Clearly something needed to change as Avaya was drowning in its massive debt obligations. Filing for bankruptcy was the only option it had left, and I believe the best possible outcome for it.

Now, the Hard Work
I know some people see the word "bankruptcy" and think the company is shutting down, but that's not the case. Lots of companies have filed for Chapter 11 and have come back strong. American Airlines, Kodak, and General Motors are just a few that come to mind. The key is to make tough calls and truly transform the company, even if it means doing things that might negatively impact it in the short term. After all, we are living in the disrupt or be disrupted era.

Now is when the hard work begins, and Avaya has many challenges ahead. It has a lot of issues to fix, and if it doesn't, this exercise will be for nothing.

CEO Kevin Kennedy has positioned Avaya as a full-stack provider, and that's important in this digital world in which the complexity of cobbling together point product solutions can be high. Because of this, many businesses prefer vertically integrated solutions, and Avaya has previously tried to deliver those. The problem today is that the company's portfolio aligns with delivery of what had been a full stack a decade ago.

Avaya has many good parts -- UC, contact center, video, network infrastructure, and Wi-Fi -- but it needs to somehow augment those with emerging areas like security, software-defined WAN, augmented reality, and machine learning. It can fill some of these holes via partnerships, such as the one it has with FatPipe to extend its fabric to the WAN (see related post). But it should build up capabilities in other areas, like machine learning, in house.

If Avaya does end up selling off parts (which, again, I hope it doesn't), it should use the money to acquire pieces needed to modernize the stack. Avaya has many of the components it needs to compete in a rapidly digitized world. It needs to keep them together while adding to them with emerging technologies. In all likelihood the short-term solution will be to fill the voids through technology alliances and a major shift in internal R&D.

Another challenge is platform modernization. For example, Avaya has built its Avaya Pod Fx, for virtualized communications, on converged infrastructure. While that may meet the needs of some enterprises, making it available on an even more tightly integrated, software-centric hyperconverged platform could significantly cut the footprint down from a full rack to probably a quarter of that size, lower the price point, and increase the agility.

'Cloud By Avaya'
One last area of focus for Kennedy and team should be in delivering an Avaya-branded cloud. As I pointed out earlier this week in my post, "The Curious Case of Zang Office," midmarket enterprises do have the option of buying a true cloud offering through Avaya offshoot Zang, a CPaaS solution. But an Avaya solution requires that a business either builds its own private cloud or gets the capability from a partner that has deployed the infrastructure.

I had a conversation with an Avaya sales rep about a week ago regarding Equinox, the converged multimedia communications, collaboration, and conferencing client and server-side component introduced in the fall (see related post, "Avaya Evolves Enterprise Portfolio"). Equinox is a great product with strong customer interest, the sales rep told me. However, if the customer wants the full version it has to dedicate what the rep described as "an insane amount of data center resources." If Avaya had its own branded cloud, the discussion would center on the number of users to support, and the company would be up and running very quickly. The "Powered by" model is a nice approach, but it should be a supporting actor in an overall cloud story, not the main focus.

One final point: Kennedy has mentioned several times about shifting Avaya to a successful software and services business. While I agree it needs to continue down that path, I caution the company to not over-rotate away from hardware. Some things will always be done best in hardware, while others are optimized in software and some in silicon. The key is to leverage the strengths of each and strike a balance instead of swinging the pendulum too far in one direction.

Avaya has filed bankruptcy and set a plan in motion. In the digital era, market leaders move with speed. Now that Avaya will be able to unburden itself from its massive debt, it should become, like the bionic man, better, stronger, and faster.

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