Rewiring Lucent In A Rush

The telecom-equipment giant shows how an old manufacturing outfit can battle upstarts on the Net

Bruce Brock knows that his Power Systems division isn't the flashiest business at Lucent Technologies Inc. In a company that produces cutting-edge communications systems that speed voice and Internet traffic around the world, this $1.5 billion unit is in the dry-as-toast business of making batteries and the like. Yet if Brock has his way, the unit in Mesquite, Tex., may shape the company's future as dramatically as the Nobel-award-winning Bell Laboratories research division in Murray Hill, N.J.

That's because Power Systems is at the vanguard of Lucent's effort to shift all of its operations, indeed its entire being, to the Web. Using the Net's vast reach, Power Systems is linking its operation to all its suppliers and customers, cutting hours, days, and even weeks off the old way it did business. By the end of 1999, executives say, the unit will enjoy annual revenues per employee of $312,000, up 25% over a year ago. "What we have to do above everything else is cut time to market," says Brock. "The only way to do that is to tie every element of the front and back office together using the Web."

Brock and Power Systems offer a case study in how companies that were born in the old manufacturing economy are attempting to redesign themselves for the speedy Internet era. They're playing catch-up, no question. Companies such as Lucent, which trace their corporate ancestry back to the late 19th century, are under enormous pressure from rivals built from the ground up on digital systems. Consider Cisco Systems Inc., a 15-year-old competitor. The Silicon Valley company now sells 80% of its networking gear over the Web. That, combined with using the Net to link customers and suppliers, has boosted revenues per employee to $650,000 vs. Lucent's $250,000. Cisco's operating margins outpace Lucent's, as well: 25%, vs. 16%.

That's why Brock planted the seeds of change at Power Systems. A former Honeywell Inc. executive who was lured out of retirement to run the business 212 years ago, he has brought an outsider's perspective to Lucent. His boldest move was to set up a new unit within Power Systems that is designed entirely around the Web. Called Titania, the group in nearby Austin makes high-end power systems that keep today's fastest computers from overheating. All orders are filed and processed over the Net. Titania's manufacturing is subcontracted out to partners Solectron Corp. and Flextronics International Ltd. Those suppliers, in turn, are linked to Titania's Web site so they know about an order the instant Lucent gets it. That leaves Titania's workers free to focus on designing and marketing the power systems.

So far, the payoff has been profound. The product-development process for Titania takes just seven months, vs. nine months for the entire Power Systems unit. Titania's outsourcing approach cut its inventory spending to some 80% of what Power Systems spends. Brock figures that by yearend the 100-person unit will be generating $1 million a year per employee. "The thing that is unique about Titania is that we created the model with the Web in mind," says Brock.

But Titania isn't Lucent. With a decades-old tradition of manufacturing, Lucent is moving to the Internet more slowly. The company says it now sells 30% of its equipment online and expects to boost that to 40% by the end of 2000. What makes e-engineering so complicated for Lucent and other older companies is that operations have to be rebuilt from the ground up. Not only does Lucent have to change its way of doing business, but so do its suppliers and customers. To figure out how to adapt, Lucent's executives are looking to experiments like Brock's at Power Systems. "We think they have a very innovative model," says Mary Whelan, a marketing vice-president developing e-business strategies for Lucent's Global Service Provider Business, which sells equipment to phone carriers.

How well? Well enough to save the business from the corporate trash heap. Three years ago, before Brock arrived, Power Systems employees feared Lucent would sell the unit because its financial performance was mediocre. But Brock quickly set about sprucing things up. He found that one of the easiest ways to boost productivity was to move basic clerical and administrative tasks to the Net. For example, the support staff that helps customers keep track of orders and other documentation has been cut by as much as 75%. The cost of processing an order has fallen by about 30%, or between 50 cents and 75 cents. The little things add up: Power Systems operated with 16% fewer employees in the past year than in 1998, even though its revenues soared more than 20%.

Power Systems is setting an example for other divisions of Lucent. Brock and his deputies were summoned to company headquarters in Murray Hill last August to deliver a seminar on e-business to the company's senior executives. The strategies are now being applied to another Lucent business unit, Systimax, that manufactures cable systems for buildings. Systimax failed to meet its 1999 financial targets, so Lucent is counting on e-business to boost results in 2000.

STRONG SUPPORT. Still, Power Systems' e-commerce experiments don't have universal support at Lucent. There are some executives who believe that the company's most complicated products, particularly the multimillion-dollar telephone switches bought by AT&T and Bell Atlantic Corp., will always be sold best face-to-face rather than over a Web site. But by and large, Lucent is beginning to use the e-commerce lessons from Power Systems throughout the rest of the company. One thing that helps is that Brock has strong support from Lucent's senior managers. In particular, he has been able to share his vision with William R. Spivey, another Honeywell executive, who joined Lucent in 1997 as president of its Network Products unit.

One of Lucent's most promising efforts is a plan to link the company's massive corporate intelligence databases to the Net. Right now, the information available through most of Lucent's Web sites is limited to one business unit or one function, such as sales or marketing. Lucent plans to tie all of its computer servers together so data can easily be shared across the 150,000-person company.

The effort could give Lucent a secret weapon in the communications-equipment market. William T. O'Shea, the executive vice-president charged with selling to corporate clients, has spent several years building a detailed database called Midas, which has oodles of information on 1.5 million customers and 6.5 million potential customers. By making this gold mine of data available companywide, O'Shea thinks Lucent will be able to pinpoint obscure buying patterns or unearth hidden market opportunities that no one has detected before. By next year, Midas is scheduled to be connected to the sales team's Web site.

Another Web tool that's gaining wide acceptance within Lucent is the so-called Business Case Assessor. It's a database with detailed information about telecom markets around the world. It can be used to figure out telephone rates in any market, the size of the market, its growth rate, and the amount of time it would take to recoup its investment in a given product. The information used to be available by telephone--but it often took a couple days for someone to call you back with the answer you needed. Now, the sales force or customers are starting to tap into the data on the Web anytime.

The product helped land a deal with Banana Republic earlier this year. The clothing chain was planning to buy a calling center to field phone calls and e-mail for its growing catalog business. But it hadn't decided which company to buy from, and it wasn't sure where to locate the center. In a sales call before Banana Republic executives, Lucent's sales team hooked into the Business Case Assessor on the Web. Impressed with the detailed cost-benefit analysis, the retailer gave Lucent the job.

REDUNDANCY WRINKLE. In proper Web fashion, Lucent is refining these new systems constantly. For example, the company is remaking its iBuy Web site where customers place orders electronically. One of Lucent's clients, Sun Belt Telecommunications, a $200 million wholesaler of telecom equipment in Allen, Tex., ran into problems. It found it had to enter data in its own purchasing system and then copy the information into iBuy's purchasing system. A new version of iBuy, due in several months, will make it possible to merge the ordering systems so customers need only enter the data once. "We don't know of any other company that will have that capability, and we believe it will give us an advantage," says Lucent's Whelan.

Despite all the work that Lucent has done, the old hands of e-business say the telephone-equipment maker and its peers still have a lot to do to catch up with spritely Cisco and other e-business pioneers such as Dell Computer Corp. and Intel Corp. "I think without question the telecommunications industry should be moving more aggressively in the same direction as we have," says Robert Langer, director of Dell's online operation.

Lucent says that what Brock is doing at Power Systems is just the beginning. "This is the tip of the iceberg," Whelan vows. Good thing. While Lucent is a leading example of how old-line manufacturers can adapt to cyberspace, it still has a ways to go to be truly ready for the Internet era.