Avaya, Cisco, Nortel Compete For Fed Network Hardware Bucks

Avaya, Cisco, Nortel Compete For Fed Network Hardware Bucks<@VM>Technology Outlook

Nancy Lamberton

The top network hardware companies are battling for supremacy in a federal market that finds agencies scrambling to beef up network infrastructures.

Companies such as Avaya Inc., Cisco Systems Inc. and Nortel Networks Corp. are responding to federal agencies' need for an infrastructure that will enable them to speed data communication, bridge disparate systems, link remote workers and improve internal and external services.

At stake is the multimillion-dollar federal network hardware market, valued at $549 million in 1999 and projected to grow at a 4 percent compound annual growth rate to $667 million by 2004, according to a newly released report by Input Inc., a Chantilly, Va., IT market research and marketing services firm.

Input defines the market as customer premise equipment and aggregated switch procurements, including routers, hubs and switches.

The hardware market may be a drop in the bucket compared to the $7.1 billion the federal government spent on network telecommunications in 1999, a market that also includes leased circuits expenditures and network and professional services.

However, the federal market, with its large enterprise deals and leadership role in networking, offers these players considerable bang for their buck, providing high-profile reference accounts to point to in their international government, state and local, and commercial sales.

The failure of dot-coms and shift in commercial network spending also raises the profile of the federal networking market.

"The slowdown on the commercial side is indicative of what's happening in the economy," said G. Scott Spehar, vice president of San Jose, Calif.-based Cisco Systems' federal operations. "We've seen a shift in client focus across the line. That makes the federal contribution more important."

Spehar joined Cisco's federal business in November 2000, after two years as operations director in the company's Northern California Enterprise.

"The federal government as a customer has a lot more influence on the communications industry than other companies give them credit for," said Gene Merson, senior director of Toronto-based Nortel Networks Federal Solutions. Nortel reported 2000 revenue of $30.3 billion. "Our government is of such a magnitude that they literally touch every facet of commercial industry."

Nancy Lamberton, president of the government solutions business of Basking Ridge, N.J.-based Avaya, said: "The U.S. federal government is Avaya's single largest customer. Our business is built around serving the U.S. federal government." Avaya's total revenue was about $7.4 billion in 2000.

In contrast, Nortel officials said the government accounts for a small percentage of its overall business. All said growth of their federal businesses matches that of their companies overall.

Avaya, Cisco and Nortel deliver their equipment to the federal market largely through the systems integration channel. Nortel and Avaya hold General Services Administration schedules and other contracts. Avaya was spun off from telecom equipment maker Lucent Technologies last fall.

All three maintain federal government sales organizations designed to assist their channel partners in securing deals by playing a consultative role in the sales process.

Avaya and Nortel officials said they have been employing this strategy for some time, while Cisco's Spehar calls the approach a relatively new one for the $18.9 billion network solutions provider, as well as for its federal organization.

Over the last three years, the company has shifted from box-pushing to focusing on customers' needs in context. Engineers, who greatly outnumber sales people in Cisco's government group, are being asked to understand the customer's environment and propose a number of solutions.

The consultative role is "a little scary for an engineer," Spehar said. "It will be an evolution for us."

Avaya, Cisco and Nortel compete in a number of product areas, with Cisco and Nortel meeting head to head most often. The three also contend with a long list of other firms in specific product areas.

Mark Fabbi, vice president and research director for GartnerGroup, the Stamford, Conn., research and advisory firm, said Cisco is the dominant player, and Avaya is the wild card of the group because of its limited data experience.

The top-spending federal agencies include the Office of the Secretary of Transportation, which spent an estimated $69 million on networking hardware in 1999, the Office of the Secretary of Defense, with spending of $64 million, and the Navy, with $56 million.

Major Cisco federal customers include the Army, Navy, Marine Corps and NASA. Avaya has Defense Department clients as well as the departments of Justice, State and the House of Representatives. Nortel customers include the departments of Defense, Treasury and State, and the National Institutes of Health.

Understanding the government's proposed technology initiatives as part of pre-sales consultations is in part predicated on understanding what is influencing the government.

"A major difference between the commercial and federal market is what lies behind the driving factors that cause them to need something," said Nortel's Merson. "In commercial it's always revenue. In federal government, that plays a role, but security is what's behind that: financial, physical, communications security or providing services to the citizenship."

Another strategy behind the consultative approach to the government market is "the educational aspect, to make sure the latest technology is included in the request for bids," said Terre' Bracco, director of e-business infrastructure for Current Analysis, a Sterling, Va., competitive analysis firm. "The government, in the past, has shown remarkable awareness of how far they have to go to adapt the latest office technology. That makes it a doubly good time to court that market."Long-term migration to Internet protocol networks underlies much of the top network hardware providers' advice to agencies. Avaya, Cisco and Nortel officials agreed that voice over Internet Protocol, or transmitting voice phone calls over the Internet, is garnering the attention of federal executives, although many are still just exploring the technology.

The Federal Aviation Administration, for example, will try Avaya IP technology to connect remote field offices to its main network, beginning in April.

But the three vendors' perspectives on federal interest in other technologies reflects their historic strengths: Cisco's in data, Avaya's in voice and Nortel's balance of the two.

Avaya's Lamberton, for example, cited government interest in customer relationship management and unified communications: integrating voice messaging, fax and e-mail. Nortel's Merson pointed to optical technologies, e-business, gigabit Ethernet and migration from PBX to IP as leading technologies of interest.

Meanwhile, Cisco's Spehar said among government agencies there is interest in security, optical, wireless technologies and AVVID, its architecture for voice, video and integrated data.

All three companies are converging on IP networks to handle all forms of traffic.

These competitors face an uncertain market that has already taken its toll. Cisco's stock dropped from roughly $80 a share a year ago to about $24 in early March, and the company missed Wall Street analysts' second quarter expectations by a penny, sending a shock wave through related technology stocks. However, many analysts are still bullish on the company's long-term prospects.

Nortel stock dropped 33 percent in February after the firm announced 10,000 job cuts and scaled back its 2001 profit forecast by two thirds; but financial analysts, such as Salomon Smith Barney, are maintaining a buy on the stock.

Avaya met analysts' expectations of 16 cents a share in its first quarter and plans mid-single-digit revenue growth and a doubling of net income in 2001.

"The financial markets are beating all of them up across North America," said Gartner's Fabbi. "It's clearly impacting their growth opportunity. They've all had hiring freezes or staff reductions and are picking and choosing how to spend their resources."

Their financial troubles make the large, budgeted federal projects even more attractive to these companies, he said.

Despite the recent difficulties, the three "seem to be well-equipped to rival one another for some time to come," said Current Analysis' Bracco.

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