Avaya's big reinvention

The phone-gear maker is going private, but that's just the beginning of the makeover. Fortune's Stephanie Mehta looks at the biggest paradigm shift in telecom for a century.

By Stephanie Mehta, Fortune senior writer

NEW YORK (Fortune) -- Just a few weeks before announcing his company's $8.2 billion sale to private equity groups, Avaya (Charts, Fortune 500) CEO Louis D'Ambrosio was talking about a different set of big changes going down at Basking Ridge, N.J., company, which makes telephone systems for corporations and call centers.

In a wide-ranging 90-minute interview with Fortune, D'Ambrosio talked candidly about his efforts to remake Avaya, a Lucent (Charts) spinoff that never quite captured the buzz of its former parent (in its heydey, at least) or one of its biggest competitors, Cisco Systems (Charts, Fortune 500). The upshot: Don't think of Avaya as a phone maker; think of it as the company that helps improve business processes.

It doesn't sound very sexy, but D'Ambrosio, an IBM (Charts, Fortune 500) veteran who previously served as head of global sales and marketing at Avaya before becoming CEO about a year ago, certainly makes a convincing pitch. A favorite example: One large customer used to have an employee monitor inventory levels, and when inventory got low, the employee would initiate a series of calls to determine how and what product to get in the warehouse. Avaya came in and installed a rules-based engine in the company's SAP (Charts) business suite that automatically triggers a conference call among the key individuals. "We are taking the human latency out of the business process," D'Ambrosio says.

At the heart of Avaya's new calling: the convergence of voice and data systems. In the old days companies had one set of equipment and phone lines for voice calls, and another set of gear and lines for computer and data services. In recent years, of course, telephone calls increasingly have migrated over to the data network, and voice is just another Internet Protocol-based application that runs on the same corporate systems that handle e-mail, web searches and other data applications.

According to D'Ambrosio, of the 50 million corporate phone lines shipped each year, about 75% of those lines are Internet Protocol, or IP, lines. Just four years ago, IP accounted for only about 20% of lines shipped. "This is one of the most significant paradigm shifts the (technology) world has seen in the last century," D'Ambrosio says.

IP matters because it essentially enables customers to "program" their voice communications much the way they program other automated functions in their businesses. D'Ambrosio, for example, gets an e-mail message sent to him every time a key customer experiences problems with its Avaya network that reach a certain level of severity. But, he might decide that for his top three customers to instead get a phone call so that he can talk directly to the technicians working on the problem -- or automatically initiate a call to the customer itself.

Of course, Avaya's push into the kind of "consultative" role with its customers should come as no surprise given D'Ambrosio's IBM heritage. It also comes at a time when Avaya faces increasing competition in its core business. Last year, around the same time D'Ambrosio took the reins at Avaya, Microsoft (Charts, Fortune 500) announced plans to team up with Avaya rival Nortel (Charts) to deliver business phone systems. "Then an organization is looking purely for voice infrastructure, it is a bare-knuckle fight among Avaya, Cisco, Nortel, Siemens, Alcatel Lucent, and now Microsoft," he says.

But D'Ambrosio sees Avaya's independence as a virtue, enabling the company to partner with various companies without worrying about how it might affect legacy relationships. He thinks the race to enter the business communications space may force certain big corporations to rethink their alliances. "As companies get more and more in our space, it will be interesting to see how the competition postures against each other," he says. "I don't know how I'd feel if I were IBM and Cisco, my partner, bought WebEx." (WebEx is a web conferencing system that competes with IBM's Lotus Sametime service, which Cisco was supposed to sell under a wide-ranging partnership announced in March.)

Whether D'Ambrosio's private equity partners feel the same way about Avaya's independence remains to be seen. Investors Silver Lake and TPG Capital are paying $17.50 a share for the company, roughly 28 percent over where Avaya's shares traded before news reports of potential deal surfaced. Eventually, these investors will be looking for an exit strategy, and a sale to one of Avaya's many potential partners might make sense down the road. Perhaps Avaya can even install special software that triggers a conference call among management and the private equity investors when the time is right.  Top of page