Q & A: Richard McGinn, chairman, president, and CEO of Lucent

Making phones and edge switches mix

By Stephen Lawton

Richard McGinn last month added the title of chairman to CEO and president of Lucent Technologies Inc. McGinn's goal is to build Lucent, known for its telephony heritage as AT&T's technology division, into a voice- and data-networking powerhouse. McGinn, an AT&T veteran, spoke to LAN Times about his vision of data networking, convergence, and making his $27 billion startup even more powerful that it already is.

LAN Times: I would like to talk to you about your vision for the company, particularly in the data area, although we can talk a little about the voice area as well. Where do you see Lucent going? Why does Lucent think it can be a player in the data-networking market?

McGinn: First of all, we are a new company just really launched in 1996 and we think we're off to a good start. We began our existence as a fairly large startup. Most people in the industry project we'll be $30 billion in revenues this year. We're not uncomfortable with that projection.

We have really started the company fresh. We were not an organization or a company. We were just a collection of activities inside of AT&T. So, we had to actually form a company. We had to create the company legally, launch, and make sure we didn't de-focus on the customers as we're going through the IPO process and really create a strategy for ourselves.

We have decided that our goal or aspiration is to become the leader in communications networks worldwide and in the supporting technologies for those communications-intensive networks. That includes serving service providers, enterprises and--through our semiconductor business or microelectronics business--serving the systems companies who are so integral to the expansion of the intranet and extranet marketplace.

LT: When you say systems companies, you're talking about resellers?

McGinn: Sure, we sell out of our semiconductor business to 3Com [Corp.], Sun Microsystems [Inc.], and Compaq [Computer Corp.], as well as to [LM] Ericsson, Nokia [Corp.], and Motorola [Corp.] on the communications side. For people who use are chips and servers, we have about a 40 percent share of the PC OEM modem business in the United States. We sell the modems that they use in there vs. U.S. Robotics [now 3Com] going into the retail marketplace.

About 80 percent of our chip business is absorbed outside of Lucent, or conversely, only 20 percent of our output is taken by Lucent. Every single leading-edge capability and technology that is available goes to any customer as soon as they are ready for it. That's the only way for that business to compete.

We have systems businesses like wireless infrastructure systems, while we have data networks more and more of that every single day. And we have a very large communications software business that is both for managing networks, as well as application software for those networks. It's about a $1.2 billion-business and it has the same characteristics as every software business you'd know and love in terms of the kind of margin structure and profitability. However, it's very specifically focused on communications as systems of applications.

We've recently sold some businesses. We sold a piece of our government business to General Dynamics [Corp.] We created a venture with Philips [Electronics N.V.] to move out of trying to be a consumer electronics company through phones and distribution phones. We had sold various bits and pieces of the business that made boards or did custom manufacturing for other people. We decided to try to focus on the highest-growth segments in the communications networks.

LT: While we're talking networks, have you drawn any kind of line in terms of the size of company that you want to focus on in terms of the Lucent brand and Lucent-developed products as opposed to products that you'll get from partners?

McGinn: We are not size-specific at this point. If you think about how the technology is evolving, [and how] the marketplace is evolving, we have a particularly strong position with service providers at this point. If you look at our service-provider business, it is beginning to push towards $20 billion on an annualized basis. That's substantial presence and great relationships with those players around the world and it gives us a chance to build on that relationship as networks evolve.

As we move from a circuit world to one where circuit switching continues to grow, what you have are new visions of how networks will evolve. I guess the ultimate vision is taking IP out of a home, an intranet or an enterprise and then plugging it into an optical layer. But we're not there yet.

What you've got is an evolution of these large-scale networks, carrier-grade networks, where SONET rings are being deployed aggressively and ATM core is going in place to do the aggregation of the traffic that is coming out of all different pathways and then transporting that across an optical backbone. We expect that to be the norm for carrier-grade systems for about five to seven years, [but] there will always be exceptions to that norm.

As IP moves into version 6, version 7, version 14, and maybe even fundamental changes in its structure, you'll begin to see IP maturing to hook up directly into optical in that five- to seven-year time frame. So we have a good view of the longer term network and it is the time between now and then that is less clear in giving people a number of choices right now.

On the enterprise side, you and others have chronicled that routers themselves are slowing down in terms of their growth rate. Really what is happening now is switching or switchable routers [are] really picking up in terms of importance in growth and in ability to handle the networking requirements out there. We are right in there. Our own efforts in this area, and our acquisitions of Livingston Enterprises [Inc.] and the Port Master product, as well as the gigabit-Ethernet products from Prominent [Inc.], are featured prominently with our approach to the enterprise marketplace, either through resellers, on our own, or in conjunction with our partners.

LT: You bring up the acquisitions that you made. In looking at your recent acquisitions, you've been looking at point products as opposed to acquiring companies that might have a broad array, such as Cabletron Systems Inc. Why is that?

Also, is there a strategy at the low end to continue to partner with Bay Networks Inc. to fill in from the very basic hubs to the departmental?

McGinn: First of all, we have very specifically made the choices that we've made for acquisitions thus far on the basis of beginning to establish category leadership in certain categories. That's a step-by-step process. We're in essence marshaling our resources as these networks begin to both evolve and integrate.

Secondly, the financial analysts tell us we are not able to do a pooling of interests from a financial standpoint until October of 1998 and any major acquisition would be diluting in nature. That is something that does not go unnoticed by us.

Now we are investing substantially in our own R & D from an organic standpoint and working with partners to provide access to products to begin to build out a set of capabilities within our overall strategy.

We think that we have got a lot of good opportunities ahead of us. In fact, we are not limited by opportunities whether it is in wireless systems, in communications software, or in DSPs [digital signal processors] for the business or in data networking.

There is a whole host of opportunities for us and we want to manage the business on an integrated basis within the construct of the business model that we've set out to grow the business substantially at the top line despite our size and to have earnings leverage to pull through an even stronger performance at the bottom line. So we are investing and marshaling our resources here and feeling good about the day-to-day progress that we are making.

LT: Lucent is roughly the size of Cabletron Systems Inc. plus Bay Networks Inc., plus Cisco Systems Inc. plus 3Com--multiplied by two. It's not a small company. Can it move quickly enough? Normally, large companies are slow to move into new markets and slow to focus on emerging technologies.

McGinn: We believe that you either move with speed or you die. It's the converse of "speed kills." The absence of speed will reduce our success in the marketplace and we are absolutely passionate about moving with speed. We are decision- and performance-oriented rather than action-oriented. We don't mistake movement for performance. So it's "make a decision; execute a decision; and do it quickly." We have a bias for that in the business.

The decision to deploy SAP for the whole enterprise was decided [in] two meetings over a three-week period beginning in 1996. Now, work had been done by people in the information office organization, but the senior team took two meetings over three weeks, and made a decision: "Go." Yes, we understand the pain level involved. Yes, we understand how much the business process has to change. We also understand the enormity of the IT spaghetti architecture that we have and we had to move on that basis. Take a decision and go. So, you find us with a real bias for that and one that we believe that we have to accentuate day-by-day.

We are trying to reduce the latency period between the invention time in research and the introduction of a supported product in the marketplace dramatically. We'll try to get the intervals down by 50 percent. We think that is a management issue; it's not [about] the creativity of the people. It's [about] getting everybody to understand that we do not have the convenience of doing things on our terms--our customers and our customers' customers are demanding what they want when they want it. If we don't do it for them and with them, someone else will. So, we're driven to a big extent by the external requirements that are out there. Now it's becoming a way of life and it never stops. You never can get to an end game here.

LT: I heard that you use cut-outs of Microsoft Chairman Bill Gates, Cisco Chairman John Chambers, and other executives to motivate your people. The employees have a feeling that when they make a decision, when they do something, they're not going to get shot down if they err on the side of action as opposed to erring on the side of inaction.

McGinn: Have you seen the movie "Wag the Dog"? There's a great line that says, "A good plan today is far superior to a perfect plan tomorrow." It's that same bias to decide and to move and to execute against it.

We said that we are not lacking for great competitors. When you are in a space like we are in, with the opportunity to grow in a big market to start with, we get great competitors at every step along the way. Texas Instruments [Inc.] is being very aggressive in digital signal processors. No lack of good competition there. Ericsson: very aggressive, superb radio performance in wireless. Northern Telecom in switching and Cisco in data networking ... . These are all really good companies at what they do.

What we said with the cut-outs is: "These are the CEOs of these companies. They want to take away your children's college education money by virtue of having their businesses outperform us." It's personal, and what you don't do--or if you delay--makes all the difference in the world in the performance of this business. It is individual decisions day by day, team by team, that make the difference and it is not an abstraction. It is, in fact, something that everybody has a responsibility for and if you focus on the externals, if you focus on the customer needs with a passion, you focus on the shareholder investment requirements with a passion and do that simultaneously. It is amazing how much slips or recedes to the background in terms of "why you shouldn't make a decision now."

It's not science--this is straightforward. It is day-by-day. It takes gritty determination and that's why we believe that we're combining the spirit and passion of a startup with the size of the company we have now and aspire to be over time. It's a hybrid company and we divided it into hot little companies so we could focus on the segments that are the hottest growth areas.

LT: In the area of wireless, GSM [Global System for Mobile Communications] is the standard in Europe and most of Asia except for Japan and except for the United States.

In the United States, though, Lucent has been very strong in the PCS area. Is there a reason why GSM is not the standard that you focus on here? Is there a technology reason? Is there a political reason?

McGinn: First of all, it's a choice by service providers. There are some GSM systems here in the United States. My recollection is that in the early 1990s that there was an analyst report that said 70-plus percent, maybe even 80 percent of the new PCS marketplace, was going to be GSM-based. I don't know what the final tally is but the vast majority went of it went CDMA [Code Division Multiple Access] because [service providers] believe that the spread-spectrum architecture capability was a better implementation with better quality and better capacity to handle to data than the GSM architecture.

The service providers made the choices and we worked hard against that spec. So, we are not agnostic; we think that there are differences in terms of standards, but we service all of the customers. We sell GSM systems. We sell CDMA. We sell TDMA [Time Division Multiple Access] because it's a requirement in different places, but in the United States, it was freedom of choice. Freedom of choice for the service providers said that there will be a little more chaos here in terms of standards that will be resolved by interoperability over time. So, you have a software phone that works in all environments. But right now we're going to have a choice and most [providers] chose CDMA.

LT: So that in the future, you expect that you'll be able to use the same end unit here or in Europe or all over?

McGinn: Yes. But the architecture that they chose is one that we think is a very good choice and we're doing very well. One of the reasons that we are doing well is because ... to paraphrase one of our tag lines [the tag line is "We make the things that make communications work"], "we make systems that work." And they work and they work and they work. As a result of that reliability, that capability, that kind of rad-hardened performance, the cost of ownership is lower. We're taking the same mentality and the same design notions into data networks.

LT: Lucent is very involved in convergence of voice and data. What is your vision of where this convergence will be a couple of years out, and is it going to be all the way from the desktop out or is it going to start at some gateway at the edge of the network?

McGinn: At the desktop it's IP full stop. If someone needs 155Mbps to a desktop, maybe there's an ATM environment out there--maybe.

But if you're talking about the marketplace in broadest terms, it's IP at the desktop. Then there's aggregation of that traffic in an ATM fabric. And, at the edge of that intranet owned either by the enterprise or by the carrier, there'll be an aggregation point of ATM and access multiplexing going on.

In my opinion, this is an area where the service providers, in their drive to offer more value-added services to their business customers, are going to move closer and closer in the wide-area network to extend their performance capabilities down to the enterprise level. So they go with the value proposition to the CIO and say "We want to take some of that burden away from you. We don't necessarily want to do desktop support, but we want to manage your network for you and have the Help Desk, and we will own the vehicle--or lease you the vehicle on your premises or very close to your premises--that is going to take that traffic, and then we will do the arbitration across the network for you at some attractive rates so that you don't have to do some of the things that you've been doing in enterprise customer."

LT: Isn't that the old AT&T model of the telephones where the customer really didn't have to worry about the phone lines inside the building?

McGinn: In one way you may think of it that way, but the customer, the enterprise, may own the computers all throughout as opposed to leasing the phones in the old Bell system mode. The customer may own that wiring scheme, will own the application software to a great extent that runs on there. They will build their own in some instances when there are mission-critical applications, or work with third parties to do that.

The communications network company is really an organization that tries to reduce the cost of ownership and increase the reliability of that network. Hopefully, this will free up the CIO from being consumed to a great extent by what they do today in terms of network management and give them a chance to work the applications and the strategic side of things. So, I think it's a variation of theme but it is different. It's one that they are uniquely positioned to do.

LT: Ultimately, when we have a converged network who's going to own the network? Is it going to be the data people running the network or is it going to be the facility/telephony people?

McGinn: I think that they come together. They really do. I think that when you evolve to these networks you integrate those capabilities. What I have told my CIO is that we've already done that and others are doing the same thing, that you are losing this parallel-universe notion out here of different decision processes and different organizational structures at a very rapid click.

LT: It's been very interesting in that market. It's still at the point where there are religious battles going on, and depending on who you talk to people are vehemently on one side or the other.

McGinn: Only now are they being helped by the technology, which is beginning to show a path forward--how we're going to marry over time optical IP and how we deal with ATM and cell-based capabilities at this point in time.

LT: A lot of customers think of Lucent as a telephony company because that's your legacy. Is it difficult to change their visions--for customers to see Lucent as a networking company, a data company, as well as a voice company?

McGinn: First of all, we have different faces to different people. When we go to Sun Microsystems, we're not a networking company, we're a semiconductor company. I don't want to ignore the fact that's a $3 billion business. I mean, it's really quite something.

When we go to NTT [Nippon Telegraph &Telephone Corp.], we're Lucent that has communications networking capability, but what we have been working with them on is software. I'm not talking about a floppy [disk] for $69; I'm talking about a $150 million piece of software, so large a floppy that they run their long-distance network using our software. We have different faces to different people.

I think that a board member of a customer told me recently [the customer drew an X and a Y axis] "Here's a 100-percent line, here's a 99-percent line with unevenness. Here's a 96-percent line going down like that. What is that?" I said "I have no idea." He put system availability on top and said "What is that?" I said "I still don't know."

He put our Lucent symbol and another company's symbol right there and said "That's you vs. somebody else, according to our data, because we have both of you in our network. We can't run our business with this kind of system availability performance from this other company. You guys have been making networks that work for a hundred years. These guys are selling good boxes, but you can't make a network out of good boxes alone. You've got to deliver networks."

That's a big, big difference because we integrate, we do the network-management software, and that's a value proposition that is very substantial as more and more critical applications are out there in the combined world of data and voice. So we think we have advantages and we have a lot to learn as well.

LT: In looking at the revenue per employee, your numbers are pretty good compared with a lot of your competitors. Is that because of that philosophy you talked about earlier of just making the decision as opposed to sitting and studying and planning and missing windows?

McGinn: I think that one of the ways that you make progress is making unreasonable demands. What we have asked our people to do is to raise productivity performance year-over-year every single year so that we are only focused on things that make a difference. It seems as if they are responding in a very favorable way and the results continue to improve, but there's more to go and there's a lot more to come.

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