COULD AT&T RULE THE WORLD? Teamwork. Openness. Customer focus. Is this Ma Bell? Yes, and no company may profit more from the coming convergence of computers and telecommunications.
(FORTUNE Magazine) – JERRE STEAD doesn't shut his office door. Ever. He even had the lock removed. He's not a boss, he tells associates (employees, that is). Call him ''coach,'' he insists, because that's how he sees himself. Aggressively, even militantly, he focuses on customers and results: ''I say if you're in a meeting, any meeting, for 15 minutes, and we're not talking about customers or competitors, raise your hand and ask why. If it goes on for half an hour, leave! Leave the meeting!'' Stead's crinkly-eyed visage represents the new face of AT&T. CEO Robert Allen, 58, installed him in September 1991 as president of the Global Business Communications Systems unit, which makes office phones and equipment. It had been bleeding billions; Stead, who had run Square D, an electrical equipment maker, for four years, made profits materialize within months. That so impressed Allen that in March he moved Stead, 50, up a notch to run NCR, the computer company AT&T bought for $7.5 billion in stock in 1991. Nearly a decade ago the U.S. government severed the sprawling AT&T monopoly into seven regional operating companies -- the Baby Bells -- and left Ma Bell with the long-distance business, which it dominated, and Western Electric, the telephone equipment maker. Since divestiture on January 1, 1984, AT&T has shed 140,000 jobs, lost nearly 30% of the long-distance market to upstarts like MCI and Sprint, and struggled fitfully to make it in the computer business. But it - has also uprooted its complacent, sluggish, inward-looking culture -- mostly since Allen took over in 1988. Before then there were no Jerre Steads to defy hidebound AT&T tradition. Leaving doors open is both a symbol and an invitation -- to customers, employees, ideas, and information. Openness is exactly what Allen wants for AT&T. He argues that the government did AT&T a big favor by compelling it to change its ways. Customers benefited from lower long-distance rates and a sunburst of new telecommunications services. Just since October, investors have pushed the stock price up 48%, vs. 25% for Standard & Poor's 500-stock index. Allen has modernized management in ways employees of the old Ma Bell would scarcely recognize. Even competitors agree. Says Daniel Akerson, president of MCI, who has steadily chipped away at AT&T's main business: ''Divestiture was the best thing in the world for AT&T because it made them face the reality of the marketplace. They're neither slow nor lethargic nor bureaucratic anymore.'' AT&T is suddenly thriving. New managers have turned around business after business. Though revenues have hovered under $65 billion a year since the breakup, earnings per share set a record in 1992, and the stock has gained almost $30 billion in value since March of that year. That's more than the total market capitalization of IBM, the company the Justice Department left intact at the same time it whacked up AT&T. Today AT&T's market value of $79 billion is No. 4 in the world, after only Nippon Telegraph & Telephone, Exxon, and GE. Although the company handles 140 million phone calls a day, managers rarely utter the word ''telephone.'' Instead they talk of all the hot stuff that's soon to come your way: two-way video, intelligent messaging, voice recognition, computer-telephone hybrids, and other whiz-bang technologies. The networks AT&T envisions will not only handle person-to-person communication but also deliver a panoply of services for work, shopping, education, and entertainment. Robert Morris, a senior security analyst at Goldman Sachs, says AT&T appears uniquely poised to exploit what he calls the ''communicopia'' -- the convergence of communications, computing, entertainment, and publishing: ''They have the opportunity to create an entity that can't be duplicated by any other communications company.'' Allen defines AT&T's goals simply, never using the T-word: ''To bring people together and give them easy access to each other and to the information they ! want and need -- anytime, anywhere.'' Since becoming CEO he has:
-- Installed a new corporate structure that encourages cooperation among otherwise independent businesses, including cross-unit teams that forage for new opportunities. A team just below him, which includes the heads of AT&T's four major business groups, runs the company day to day.
-- Spent huge amounts of time promoting a set of company values he calls ''our common bond.'' Among the values: respect for individuals and dedication to helping customers. On this, Stead is his chief deputy.
-- Shaken up the organization and ended a tradition of insularity by recruiting executives from outside, like Stead. CFO Alex Mandl, 50, headed Sea-Land Service; Allen's top strategist, Richard Bodman, 55, ran two subsidiaries of Comsat and then became a Washington, D.C., merchant banker.
-- Built new ties with AT&T's unions, even as he makes clear that the company can no longer promise lifetime employment. The unions now sit on planning committees at both the corporate and plant levels.
-- Invested in other companies with critical technologies or attractive market positions. These range from giant McCaw Cellular Communications, in which AT&T plans to invest $3.8 billion for a one-third interest, to Silicon Valley's tiny 3DO, where $2.5 million bought a substantial (but not publicly specified) piece of what might someday be a huge electronic games and entertainment business. AT&T's core telecommunications network, a vast, intricate web of wire, computers, optical fiber, and software that Allen calls ''our crown jewel,'' is central to the company's success. It contributed $40 billion, or 61%, of AT&T's 1992 revenues. Gross profits from the network are up 13% in the past two years. After nearly a decade of steady decline, U.S. market share seems to be stabilizing a bit above 60%. That's no accident: Lately AT&T has taken aggressive legal action against competitors like MCI and BT (formerly British Telecommunications) when it believed they were trampling on its turf.
EVERY AT&T business unit now has two mandates: Grow and be profitable in your own right, but make sure you contribute to the success of the core telecommunications network. For example, the Communications Products Group, which makes AT&T's groundbreaking $1,000 videophone, must meet companywide growth and earnings targets. But the device, which works on a regular phone line, also showcases the possibilities of video, which Allen & Co. think may be the greatest source of future traffic growth on the network. The phenomenally successful Universal Card -- it has made AT&T the second- largest credit card issuer in the U.S. after Citicorp -- aims to cement the loyalties of long-distance customers, partly with an extra 10% discount from standard calling-card rates. The credit card division ultimately reports to group executive Victor Pelson, 55, whose main responsibility is the network. Late in 1992, when card president Paul Kahn wanted to develop a family of related businesses like stock brokerage, Pelson said no, we're in telecommunications, not financial services. Kahn soon quit. The specter of IBM looms large at AT&T's bucolic corporate offices in Basking Ridge, set down in the New Jersey horse country 25 miles west of Manhattan. ''One of our challenges is to be sure that our network does not become the mainframe business of the future,'' says Allen. ''IBM simply didn't recognize the frailty of that market. We can't be comforted by the fact that our network is strong. We've got to keep strengthening it.'' Chief strategist Bodman slaps his hand on the table, almost shouting: ''We've got to have openness!'' He adds: ''Much of the world saw the problems that have afflicted some other big companies for as long as 15 years, but there was some ingrained reason the managers of those companies, of all people, didn't get the message.'' The worst peril, he believes, is to think about things only one way. That's why AT&T bought NCR when it became increasingly apparent that computing and communications were merging. Explains Bodman: ''We decided that the only way we could understand how our friends in the computer industry see the world was to snuggle up alongside and make money with them.'' ALLEN INTENDS the new corporate structure to promote continual communication among the company's disparate pieces. AT&T consists of four major business groups -- the telephone network itself, equipment for telecommunications networks, end-user products like telephones and answering machines, and NCR. Allen does not carry the title of president and has no chief operating officer. Instead, the four executives responsible for the groups join CFO Mandl in a five-man presidency known as the Operations Committee. It meets for several days a month and is responsible for the day-to-day affairs of the company. Its chairmanship rotates annually. David Nadler of New York's Delta Consulting Group, who helped design the committee, calls it ''a team that's unique at this level in corporate America.''
The idea is that none of these guys can possibly make the right operational decisions for the company without thoroughly understanding what each of the others is doing. From that will flow the elusive virtue synergy, as well as carefully considered tradeoffs among groups when conflicts arise. The committee members' bonuses are based in roughly equal proportions on the performance of their group and of AT&T as a whole. Robert Kavner, 49, the group executive for end-user products, won't start developing any new kind of telephone or digital messaging device without talking to Vic Pelson about how it will work on the network. Says Kavner: ''Our committee is the point at which the aspiration of the corporation meets the practicality of the business unit.'' Last year, to knit together AT&T's enterprises even more closely, Allen and his top officers set up teams to explore and develop the six areas where they expect the greatest opportunity: video, wireless, data transmission, voice recognition and processing, messaging, and ''scalable computing'' -- a range of large and small computers all built around the same microprocessors. Each team includes representatives from the four major business groups. Allen and his lieutenants selected a team leader and an operations committee member, generally not the team leader's normal boss, to be each team's ''champion.'' The intent is to mix it up, get people talking, and figure out the businesses and structures that AT&T as a company will need next. Unlike IBM, which had almost identical 1992 revenues, AT&T is not inclined to spin off operating units to shareholders. Says Delta Consulting's Nadler, who confers with Allen at least monthly: ''There are clearly benefits to scale. The question has been finding ways to work together.'' Echoes strategist Bodman: ''Organizations that develop an army, an air force, a navy, and marines can face the threats of the world more securely than those that only have one. The trick is to get all those folks to hit the beach at the same time.''
AT&T is the only big U.S. telecommunications services company that also makes terminals connecting people to the network -- telephones, computers, and private branch exchanges (PBXs) that route calls within a company. A few years ago Allen seriously considered jettisoning all those end-user-device businesses, many of them money losers, and concentrating on services. But perseverance paid. Today innovative product design and effective marketing have made AT&T the U.S. market leader in both answering machines and cordless phones, and the $4-billion-a-year PBX and office equipment business is finally profitable. Now its managers argue that AT&T's presence in the interrelated terminal and network businesses gives it crucial advantages over competitors. Reason: All the brains in the telephone system used to reside at the central office. Telephones were consummately dumb. Today cheap microprocessors can easily give tremendous power to end-user devices. Since AT&T makes both smart end-user devices and smart central switches and processors, says Kavner, the company is well positioned to figure out the optimum technology mix for each customer: ''We can marry the intelligence of the terminal to the intelligence of the network.'' But being both a services company and an equipment maker has pitfalls. AT&T finds itself trying to sell hardware to companies that will increasingly compete with it in services. Many of its biggest U.S. customers for network equipment saw the McCaw acquisition as an attempt by AT&T to get back into the local telephone business eventually, this time without wires. Some industry analysts think that will drive away the regional phone companies as customers, since all of them are in the cellular business too. The problem appears just as severe outside the U.S., where monolithic national phone companies hesitate to buy from AT&T now that Allen has aggressively targeted international services for growth. Berge Ayvazian, an analyst at Yankee Group, a Boston technology market research company, predicts that to eliminate such conflicts AT&T could soon spin off the network equipment business. (It accounts for about 15% of sales.)
William Marx Jr., 54, who heads the group that's ostensibly causing the problem, belittles the notion that his businesses conflict with others in AT& T: ''I don't think it's an issue as long as we are supplying a value proposition for our customers. If we did anything that compromised them, we'd be through.'' But Allen thinks about the potential conflicts a lot. ''It's a manageable issue, but it requires a lot of communication and understanding with our big customers,'' he says. AT&T pays the Baby Bells huge amounts in charges for access to their residential and business customers. ''We provide 20% to 25% of their revenues, and by our analysis in some cases close to all their profits,'' he says. ''That should balance this other problem, but I'm not sure it's always considered in that light.'' In other areas it's becoming clearer how AT&T can gain an advantage because it sells both products and network services. In February, General Magic, a small Silicon Valley company in which AT&T is an investor, announced it was developing software called Telescript for sending messages between PCs and personal communicators like one now sold by EO, another startup AT&T has invested in. EO's communicator is small and portable, with a pen-controlled screen, a modem, and a cellular phone link. Any device with Telescript will be able to send text, data, and graphics, including handwritten notes, to any other Telescript-equipped device. The software can manipulate messages -- storing, rejecting, or forwarding them according to the user's instructions via either a wireless link or a conventional phone line. Designers hope Telescript will make conveying complex digital information between mobile workers as easy as making a phone call today. AT&T was the first to acquire rights to incorporate Telescript into a phone network. AT&T Microelectronics builds the powerful Hobbit microprocessor that's at the heart of the EO device. Kavner's group, which orchestrated all these deals, also has close ties to GO, a software outfit that sells the Penpoint operating system for pen-based computers. Within two or three years you'll be able to write a message by hand using Penpoint on an EO personal communicator containing AT&T's Hobbit chip, and use Telescript to send it over the AT&T network. Quite a few profit opportunities for AT&T in that scenario, no? Says Kavner: ''Frankly, if we were not in both the communications services and terminal business, we could not have pulled those deals off.'' The chain of events that led to the creation of EO demonstrates the new nimbleness at AT&T. In the early summer of 1991, EO was little more than a vision. GO was talking to AT&T about making its pen-based operating system work on the Hobbit chip. GO was also eager to put its software on a personal communicator. EO's founders met with Kavner, who decided within two weeks to help. His group became EO's primary venture capitalist and helped glue together GO, EO, and AT&T Microelectronics. Barely two months after EO talked to Kavner, the company was up and running with AT&T's money. The negotiations involved three different parts of AT&T -- consumer products, microelectronics, and network operations. EO unveiled its first products 15 months later. Says EO Chief Executive Alain Rossmann: ''Not only has AT&T been fast, but very open. They accepted that they don't have to control it all.'' Adds CEO Bill Campbell of GO: ''AT&T is the most incredibly flexible large company I've ever dealt with. You don't need to go to committees. Somebody makes a decision, and we move on to the next one.'' That sort of speed confers enormous advantages as technology quickly evolves. Says Mark Stahlman, a longtime technology analyst who has been scathingly critical of IBM: ''AT&T has its nose under all the right tents.'' Company strategist Bodman estimates that the old AT&T would have taken at least five years to devise and introduce a personal communicator. ''We don't know we're right,'' he says. ''We hope to God we are. But a new product costs less if you take it to market faster.'' None of this fleet-footedness would be possible if Allen hadn't got the company off its managers' toes. He has spent much of his five years as CEO making business units more independent, customer-focused, and accountable. In the past the company tolerated continuing losses in some businesses -- PBXs, say -- that it viewed as strategic because they served large network customers like FORTUNE 500 companies. Sometimes the finances were so muddled that management didn't know if a unit was making money or not. Between every two operations in the old AT&T were two more, both charged with monitoring the interaction. In the late 1980s the president of AT&T's then-struggling computer business complained that he controlled only 20% of his costs. Today managers can do what they want with their units, just as long as they win. They control their own sales forces and manufacturing; without that, Stead says, he couldn't have turned around the PBX and office equipment business. Now each of AT&T's 20 business units, and their subunits, is constantly monitored for success in meeting a range of financial and nonfinancial goals. Managers must keep their unit growing in revenues at least as fast as their industry -- or be gone. Allen is a supremely hands-off manager. He really believes that decisions should be made closer to the customer than he could ever get as CEO. Don't let his laid-back, laconic, folksy style give you the impression he's out of & touch. He puts strong people beneath him. And he keeps them focused on the company's goals -- witness Kahn's departure from the Universal Card. PERHAPS ALLEN'S highest priority today is defining and disseminating AT&T's core values: respect for individuals, dedication to helping customers, adhering to the highest standards of integrity, innovation, and teamwork. Senior managers say that in some top-level meetings 80% of the time is spent discussing these values and how they apply. Says Kavner: ''There's an incredible emphasis at the top of this business on our values -- orders of magnitude more than I've ever experienced -- and in penetrating emotional depth, not intellectual. Right now we are one of the most depoliticized corporations around, and it's because we share a vision.'' When a 1991 survey discovered that only 19% of AT&T's employees thought top management's statements were believable, the company magazine printed it. And when Allen decided that the organization would benefit if managers were evaluated by their subordinates, he started by getting appraised himself. Now over 800 high executives have rated their bosses and been rated in turn, and this ''upward feedback'' is spreading throughout the company. Allen talks about having turned the organization chart upside down, so that he supports his managers, who support the employees. His customers, he says, are all those who work for him. When managers describe the new marketing approach in consumer long distance, AT&T's largest single business, they talk about Allen's ''common bond.'' Market share has dropped dramatically in recent years, though it seems to be stabilizing despite vigorous competition. The marketing program makes three promises to customers: They won't pay significantly more than competitors charge; loyalty will be rewarded with discounts and special offers; and they will get a package of AT&T products and services specially tailored to their needs. Says Vic Pelson: ''It takes teamwork to offer the breadth of our products to customers who come in through the conduit of the long-distance business.'' That focus on teamwork shows up forcefully in AT&T's relations with its unions in the U.S., which represent about 138,000 of 312,000 employees worldwide. What had long been a contentious thicket is now abloom with mutual respect. The 1992 contract with the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers, AT&T's two big unions, includes groundbreaking language on cooperation. In a section called Workplace of the Future, the contract says, ''The parties share the goals of establishing a world-class, high-performance organization and protecting employment security through market success.'' Labor Secretary Robert Reich calls the agreement ''a real landmark contract'' and says it is a model for the nation. The unions recognized that today's pace of change makes traditional job security obsolete; jobs are safe only in fast-moving, responsive businesses. The CWA struck AT&T in 1986 and 1989 but couldn't stop layoffs in shrinking businesses. Over the past four years CWA membership at the company has fallen 35,000, to about 100,000. Now AT&T promises to bring the unions into planning sessions in the plants and at corporate headquarters. When jobs might be moved offshore, for example, the union will see the same data management sees, and labor will have a direct voice in decisions that affect jobs. AT&T has also undertaken to increase spending on retraining laid-off workers. Explains Harold Burlingame, senior vice president for human resources: ''We used to say, 'Come here for a job for life.' Today we say, 'Invest in us, we'll invest in you. As we proceed in the market together, out of that comes a career.' '' CWA President Morty Bahr now gives speeches to union members about serving customers. He lobbies state and federal governments on behalf of AT&T and sometimes even meets with customers to help close deals. He says he wants to demonstrate that AT&T can be as competitive as any non-union company.
Allen has set 10% annual earnings growth as AT&T's target for the rest of the decade but admits he cannot reach that goal without dramatic international expansion. Telecommunications markets are growing much faster overseas than in the U.S. Historically, AT&T was a domestic company. At divestiture it had only some 60 people outside the U.S. Today the number is roughly 52,000, about half of them acquired with NCR. For AT&T, a major attraction of NCR was its well- developed global sales and manufacturing network. Vice chairman Randall Tobias is leading the charge overseas. Tobias, 51, arrived at Bell Telephone 30 years ago, fresh out of college. Allen, then a district manager with Indiana Bell, was his first boss -- er, coach. Now Allen has handed him a huge challenge. The CEO has said that he'd like 50% of the company's revenues to come from abroad by 2000. By the most optimistic measure that number is only 24% today, chiefly from long-distance calls between the U.S. and other countries. Revenues from genuinely foreign-based operations -- like the recent sale of network switching systems to South Korea and Ukraine -- account for just 9%. Allen now backs away from the 2000 target, saying he'd be happy to reach 50% in a decade or so. Tobias recently celebrated what he considers his biggest coup so far -- a vaguely worded commitment from China to work with AT&T as ''partners'' to develop telecommunications infrastructure in the People's Republic. Tobias points out there are only two phone lines in China for every 100 people (vs. 33 in Spain and 52 in the U.S.), and every percentage point increase in so- called teledensity means 12 million new telephone lines. Since system switching equipment alone costs about $150 a line, the numbers could be big. Tobias says that eventually the deal could also include AT&T's offerings in microelectronics, fiber-optic systems, telephone sets, and computers: ''It represents a revenue opportunity of huge proportions over the next decade.'' VIRTUALLY ALL the security analysts who attended an AT&T meeting in late February came away wowed. Analyst Morris of Goldman Sachs is just one of a herd recommending the stock. He's optimistic about AT&T's ability to achieve major market share gains worldwide, partly because it has long experience selling branded products directly to consumers. That, he believes, gives it tremendous advantages over IBM, which historically dealt largely with other companies. ''Communications will be a critical service in the 21st century,'' says Morris. ''The AT&T brand could be to the worldwide communications business what Coke is to the beverage business.'' Allen's ambitions are vast, even though his own formidable list of AT&T's main competitors includes Apple Computer, EDS, IBM, and Motorola as well as BT and MCI. He thinks AT&T can more than double its revenues to $150 billion or $200 billion ''sometime in the first decade of the century,'' though he claims not to spend a lot of time thinking about it. He clearly expects all his corporate renovations to start raising the roof on revenue growth. So far they haven't, but Allen's many admirers credit him with plenty of patience. He is likely to stay on until he turns 65 in 2000. That would give him 13 years as CEO and lots of time to keep opening doors at AT&T.
CHART: NOT AVAILABLE CREDIT: FORTUNE CHARTS CAPTION: WHILE SALES HAVE BEEN NEARLY FLAT. . . . . .PROFITS ARE MOVING UPWARD. . . . . .AND THE STOCK HAS QUADRUPLED
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