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Can Walter Fix At&T?

News: Analysis & Commentary: TELECOMMUNICATIONS


So far, he's counting on nitty-gritty management changes to anchor a turnaround. Will that satisfy the Street?

In his first 100 days as president and chief operating officer of AT&T, John R. Walter has heard an earful. Customers have complained that the telecom giant is arrogant. Employees have groused that they're bogged down in bureaucracy and politics. And investors have bemoaned strategic blunders that made AT&T a bystander in the greatest bull market in U.S. history.

Now, the CEO-in-waiting is about to face his harshest critics. On Mar. 3 and 4, Walter will put on a two-day show before Wall Street analysts--detailing, for the first time publicly his plan for fixing what ails AT&T. Walter says he won't unleash any dramatic new initiatives. Rather, he'll use this debut to convince some 50 skeptical analysts that he has a fresh insight into the phone giant's troubles and a plan for managing a turnaround.

UPBEAT SALESMAN. It will be a tough house. These are the people who last fall let out a collective groan when Chairman Robert E. Allen announced that Walter, the little-known CEO of Chicago-based printer R.R. Donnelley & Sons Co., would be his successor. On Oct. 23, the day Walter was named president, AT&T's stock plunged 4.5%, to 37 3/4. "On a scale of 1 to 10, I'd rate this choice a 1," lamented Chicago Corp. analyst Kenneth M. Leon at the time. Four months later, AT&T has inched up to just over 40, well off its 52-week high of 45 1/2. Few analysts predict an uptick anytime soon, given AT&T's problems in long distance and the costly effort to move into local calling.

As he prepared for the analyst meeting during the last week of February, Walter downplayed its significance. "I'm not in awe and I'm not in fear of it," he told business week in an exclusive interview. The self-assured 50-year-old got where he is by perfecting his sales pitch. He's known to prepare for meetings--with customers, investors, or employees--as if he's going into battle.

Convincing investors--or anybody-- that he can solve AT&T's problems will take more than a socko presentation. Walter has assumed day-to-day operations at a company that for a decade repeatedly failed to execute grandiose schemes to pioneer all manner of cutting-edge digital technologies. "It has not delivered on its promise or its resources," gripes Ben A. Hock, senior vice-president at John Hancock Investment Fund, an AT&T shareholder.

By the time Allen decided two years ago to focus on telecom services only--by spinning off AT&T's phone-equipment and computer subsidiaries (Lucent Technologies Inc. and ncr Corp.)--the company's core business had started to slip. AT&T's share of the U.S. long-distance market, from which it derives almost all of its revenue, has dropped from 56% to 54% in the past year. And margins are falling, a casualty of the industry's move to flat-rate pricing. Allen, in his first interview since a Feb. 6 heart operation, acknowledges that his heir apparent now has "perhaps the toughest job in American business today."

Is Walter up to it? Does he have the management and leadership skills to unlock the talents buried inside one of the most entrenched corporate cultures in America? Can he make AT&T as aggressive as its nimble rivals? Does his background--an entire career spent at Donnelley, which is less than one-fifth AT&T's size--prepare him for the task ahead? Walter, the upbeat salesman, says he is turned on by the challenge: "Did I take this job for the ego? No. Did I do it for the money? No. I did it because it is the opportunity of a lifetime."

Walter's best bet with the analysts, as well as with customers, is to show that he can do at AT&T what Louis V. Gerstner Jr. did at IBM. Gerstner, who had no background in the computer industry, at the start avoided making fundamental changes in the company's strategies. Declaring that there was no need for a new "vision," he focused on the organizational and management issues.

At AT&T, Walter seems to be taking the same tack. He is working on a reorganization to make the company more responsive. He has ordered his executives to go back to basics and focus first on customer needs rather than internal politicking. Walter is putting in place plans that emphasize teamwork and punish infighting. Above all, he's leaning on managers to deliver on the plans they make. Walter admits it's basic stuff--but the stuff that AT&T's inbred management has had trouble with in the past. "I'm not a Bell head," he says. "Maybe that's an advantage."

For now, Walter, who admits he's still boning up on the telecom industry, relies heavily on a cadre of experienced executives. When he meets the analysts, he'll be accompanied by a dozen top executives from across the $52.1 billion company--experts on everything from consumer long distance to Internet access. Two of the key players are Walter appointments: Gail J. McGovern, 44, in charge of retaking lost ground in the consumer long-distance market, and 40-year-old AT&T veteran Jeffrey Weitzen, who moved into McGovern's old job as head of business services, the unit that sells telecom to corporations. Walter is searching outside for a top financial officer to replace Richard W. Miller, who recently resigned.

Walter will not make any major announcements on Mar. 3, but he's expected to give analysts some details of a reorganization on the drawing boards. The revamping is intended to eliminate overlaps between the business units and break down the fiefdoms. In Walter's view, the lack of coordination between these powerful units, responsible for such operations as consumer calling, corporate services, wireless, and data networks, have slowed down decision-making. "Ninety-five percent of the people who come into this office want me to make the decision," says Walter. "I ask them, what do they think we should do, and I tell them to do it. My God, just go do something."

That goes for middle management, not just top execs. To that end, Walter plans to distribute stock options further down so that more employees will think of themselves as owners. Options have long been reserved for the 585 executives in two top layers of management. Walter will seek shareholder approval to add two more layers--some 9,000 managers.

"LOW-HANGING FRUIT." Walter also is expected to make substantial cuts to reduce overhead. Despite years of staff reductions by Allen, the new president says there's still lots of "low-hanging fruit." A prime target: outside consultants who, by some estimates, are billing AT&T as much as $1 billion a year. "We want to learn how to fish," he says. "We don't want to have somebody fish for us."

The new president also is likely to cut some staffers. At the end of 1995, AT&T said it would slash 17,000 jobs within three years. But it ended 1996 with 131,400 people on its payroll--2,000 more than it had a year earlier, an astounding figure in a company with a 10% annual attrition rate. There are still 2,000 employees in human resources and 450 in public relations, for example.

A leaner, more responsive organization will go a long way toward reversing AT&T's declining fortunes. Indeed, since Allen announced the triple divestiture in 1995, analysts have rarely quibbled with the basic strategy--only with its sorry execution.

So, Walter's top priority is to make the existing plan work. To shore up the long-distance business, he and McGovern want to stop one of AT&T's favorite marketing habits: issuing checks to customers who switch to AT&T. That scheme, which cost some $2 billion last year, did little to halt the company's market-share slide. Walter wants more innovative solutions to beef up volumes. McGovern says she welcomes Walter's new perspective: "It's great having fresh eyes around."

Going forward, the strategy still revolves around "bundling"--trading on the AT&T brand name to offer customers a selection of services: local, long-distance, and wireless calling, as well as Internet access, entertainment, plus AT&T credit cards. For bundling to work, Walter notes, AT&T doesn't have to own all the pieces of the bundle--it can resell products and services supplied by others.

That's key to keeping the costs of entering new markets down. "We can't do everything because we can't execute it all, and we can't finance it," explains Walter. Reselling local calling capacity leased from the Baby Bells and gte Corp. is a prime example of the strategy. It's a tactic that Allen blessed when the 1996 Telecom Act made reselling possible. For business customers, AT&T already has resale agreements with eight alternative access providers, which link companies directly to AT&T's network.

Resale may give AT&T relatively cheap entree into local service, but the costs of competing in deregulated phone markets are still staggering. Rolling out wireless networks and launching local calling could dilute earnings by as much as 40 cents a share this year, or $640 million, estimates Morgan Stanley & Co. analyst Stephanie G. Comfort. She figures AT&T will earn $5.8 billion on revenues of $54.4 billion in 1997, a modest improvement over 1996 earnings of $5.6 billion on revenues of $52.2 billion. The current quarter's net, the company has warned, will actually come in below last year's $1.5 billion as a result of higher capital investments.

Walter will try to rein in spending, but he can't afford to go too far. Reselling is not a permanent strategy for local calling. Indeed, one of the first decisions Walter faced when he signed on was whether to still support an experimental wireless system to make the local connection. That system, which won't be ready to launch for a year or more, promises to connect consumers to the AT&T network for a fraction of the cost of a wired system, which can run as high as $2,000 per home (page 30).

Despite his support for the wireless project, Walter is taking his time about other local-market moves, say sources close to the company. "Walter has slowed things down to reassess the game plan," says an industry executive who works closely with AT&T. Meanwhile, rival MCI Communications Corp. is building local networks in 31 cities, and the Baby Bells are readying their entry into long distance. "The window of opportunity for AT&T to be so tentative is waning," warns ubs Securities Inc. analyst Linda B. Meltzer.

GOLDEN BOY. Walter is cramming as fast as he can. Over Christmas he studied a five-inch-thick technical guide to the AT&T long-distance network--the largest phone system in the world. He hasn't even unpacked the cardboard boxes still stacked in his office, a floor below Allen's at AT&T's sprawling Basking Ridge (N.J.) headquarters. Until his wife and two daughters relocate from the Chicago area this spring, he's living at a nearby hotel.

Walter has made his presence known throughout the AT&T empire. He has zigzagged across the U.S., meeting with some 7,000 employees, visiting hundreds of customers, and trying to reassure dozens of institutional investors. Some wags joke that the blond, blue-eyed Walter is the new "Golden Boy," a reference to the striking 23-karat-gold sculpture of Mercury that stands guard outside company headquarters.

The impression that the newcomer was eclipsing the boss was reinforced by Allen's recent 19-day absence for heart surgery. Allen, who returned to work on Feb. 24--a week early, against his doctor's wishes--vehemently disputes that: "Bob Allen is still the CEO," he says. "What AT&T needs more than anything else is leadership on operations and execution. John has taken on those tasks with a lot of enthusiasm and energy."

And more. Although Allen won't give over the CEO title to Walter until next January and the chairman's job the following May, when he retires, he has brought his new president in on decisions that are customarily the sole province of a chairman. Walter and Allen, for example, together picked two new directors, including the first outsider with a technology background, who will join the board this spring. They decline to disclose the name.

Publicly, it's the Bob and John show--an image AT&T carefully promotes. Both will be at the analysts show, and for this article, the company refused to allow Walter to be photographed without Allen by his side. In interviews, both men insist they are working as a team, with, as Allen says, "no space between our shoulders." Of his boss, Walter says: "I have great respect for the man. I can't do anything but benefit from his knowledge and experience, and I'd be a fool not to." Confides a Walter associate: "It's a little awkward and difficult, but they are managing through it."

From the outset, Walter knew his ascent over so many seasoned insiders would cause tension. Before joining AT&T, he sought advice from other outsider CEOs--ibm's Gerstner, Eastman Kodak's George M.C. Fisher, Sears' Arthur C. Martinez, and USAIR's Stephen M. Wolf. Their advice: Watch your back. "People are going to tell you up front that they want to be part of your team, but don't believe that."

"CARPETLAND." Walter admits he hasn't always been diplomatic. He poked fun at "carpetland," what one employee calls AT&T's "deathly quiet and energyless" executive suite. He has bluntly told employees the company lacks a clear strategy, its management systems are a disaster, and its plans for local service too grandiose. One manager who got the lecture was so taken with Walter that he raved to colleagues in a widely circulated E-mail message. "I was extremely impressed with Walter, his energy, his sense of humor, and his candor," wrote AT&T manager Allan Watson.

Not everyone took kindly to the critiques from a stranger. "You've got to earn the right to say those things," says one middle manager. "He hasn't. He's a little too much of a salesman." On the other hand, AT&T salespeople love the new guy. Two weeks after his arrival, Walter walked in unannounced on a room of 100 sales managers and discussed the issues facing the company in a town meeting format. They rewarded Walter with a standing ovation. "I've never seen that before," says McGovern. "They were really mesmerized."

Of course, salesmanship has been Walter's trademark. At Donnelley, which he joined as a trainee after graduation from Miami University in Oxford, Ohio, he earned the nickname Jaws. By the time he was 25, his commissions exceeded the salary of Donnelley's chairman.

Walter shot up the management ladder, becoming president in 1987 and chief executive and chairman two years later. During his stint as CEO, the company's sales nearly doubled, to $6.6 billion, and it secured its lead as the world's largest commercial printer.

As CEO, Walter tried to shake up the stodgy Donnelley culture and move the company into electronic publishing--with mixed results. Over the course of his tenure as CEO, profit margins were halved, to 3.5%. His purchase of Stream International, a $1.5 billion producer of software diskettes and computer manuals, for instance, didn't pan out. In 1996, the company took a $560 million restructuring charge to close plants, causing a net loss of $158 million. It also cost Walter his bonus.

Now, salesman Walter may be facing the biggest pitch of his career. If he can't dispel doubts at the Mar. 3 meeting about his ability to shake up the AT&T organization, the cloud over the company will only darken. "We'll be looking for an energetic, clear presentation by Walter that really gets people jazzed about the business and the opportunities," says Comfort. It's showtime, Mr. Walter.By John A. Byrne and Catherine Arnst in Basking Ridge, N.J., with Richard A. Melcher in Chicago and bureau reportsReturn to top

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