Chris Barnard
Vice President, European Telecommunications and Networking
Michael Vorisek
Program Manager, Telecoms & Networking, Central and Eastern Europe
Avaya: Restructuring to Drive Innovation
May 2017
On January 19, 2017, Avaya announced it was filing for Chapter 11 protection under the U.S.
Bankruptcy Code, aiming to restructure its debts and obligations while continuing its daily operations.
Against this backdrop, customers and partners worldwide are asking what effect the restructuring will
have on them. This Analyst Connection provides IDC's understanding of why the restructuring is
happening and how this will affect Avaya's customers and partners.
The following questions were posed by Avaya to Vice President Chris Barnard of IDC's European
Telecommunications and Networking research and Program Manager Michael Vorisek of IDC's
European Telecoms & Networking group, on behalf of Avaya’s customers and partners.
What does financial restructuring mean? Are there any differences between the
regions?
Avaya came into being in October 2000, when it was spun out of Lucent
Technologies and listed on the New York Stock Exchange, and has been a leading and
innovative UC&C player ever since. Avaya became a private company in 2007, with most of
the company's debt stemming from this decision, which was taken at a time when the
expectations for the UC&C software and equipment industry were more positive than they
are today. The global economic crisis of 2008–2012, accelerated migration to cloud, and the
rise of digital transformation as a new key ICT market topic have impacted the technology
marketplace. IDC's data for the worldwide IP telephony equipment and UC applications
market indicates flat growth over the next few years (a CAGR of -0.6% through the end of
2021). Therefore, despite a positive operational performance since 2012, Avaya wasn't
generating enough cash to pay off the debt, which it had to keep rolling over. The debt
structure threatened to paralyze Avaya's capability to compete, and the company
subsequently filed for Chapter 11 to ease this burden. Based on the proposals presented by
Avaya's management, and pending court approval, the debt may be converted into stock.
The court will also examine which assets may be sold and used to cover some of the
commitments, such as the planned sale of Avaya's networking business to Extreme Networks
(announced in March 2017).
It is important to bear in mind that the company will carry on operating normally while the
restructuring takes place. Avaya announced that it has secured a $725 million debtor-inpossession credit link from Citibank, which should provide sufficient liquidity during the
Chapter 11 process.
Avaya is a global player — one that controls a 12.8% market share of the worldwide onpremises IP telephony and UC applications market (as per IDC's 2016 research). Avaya was
the second-largest vendor in Latin America last year, with 20.6% market share; number three
in the U.S. and Canada, with a 14.5% market share; and held 12.3% and 9.4% of the market
in EMEA and Asia Pacific, respectively. To be able to run its global business, Avaya controls
many subsidiaries worldwide. Legally speaking, the restructuring exclusively affects Avaya's
U.S.-based entities and not the company's subsidiaries in other countries. However, the U.S.
entities are key to the business of regional subsidiaries in terms of providing the products and
enabling the services with which these subsidiaries go to market.
It is also important to ask the question: How will Avaya look after it files for Chapter 11? It is
imperative that the company does not continue with a "business as usual" approach, but
rather focuses on sustained innovation to drive the future of enterprise communication and
collaboration. To IDC, this means a world in which Avaya has a keen focus on where it can
add value in the process of digital transformation, how it can drive overall customer
experience (fundamental in the digital economy), and what this means to the advanced
workflow and contact-center skills that the company brings to the table.
What will the impact be on the client base? And what does restructuring mean for
innovation and delivery in terms of the portfolio of products and services?
We are convinced that restructuring will have little impact on Avaya's clients in the short term.
The large customer base is Avaya's strongest asset. In FY2016, 52.3% of the company's
revenues stemmed from services. This is well above the industry average, and, regardless of
the result of restructuring, both the owners of Avaya's assets and its business partners will
want to secure continuing income from services to customers. We therefore expect current
deployment projects to be successfully completed and support, software updates, and Avaya
Client Services relating to any of the products in Avaya's current portfolio to continue to be
available to customers.
In the medium to long term, the outcome of restructuring could impact Avaya's capability to
deliver innovations in its portfolio. If the restructuring succeeds, Avaya will be able to continue
delivering new product features, whether reacting to competitors' offers or shaping new
trends with original R&D — an area in which Avaya is still focusing a lot of attention. But,
should the restructuring fail, it will raise questions around future product roadmaps.
The impact is likely to vary by technology. Avaya's key technology markets today are onpremises IP telephony and UC applications, and contact center solutions. Avaya has
traditionally had a strong stake in contact center. IDC's 2016 research confirms Avaya's 6.8%
share of the worldwide market for contact center software and infrastructure — behind some
contact center specialists but safely ahead of other UC&C software and equipment vendors.
Contact center revenue represented 28.7% of Avaya's communications product revenue in
2016, while on-premises IP telephony and UC applications accounted for 67.8%. Other
technologies, such as video conferencing and telepresence equipment, and SBCs,
accounted for the remaining 3.6%.
IP voice and UC platforms are relatively mature technologies today, and the pace of
innovation in these areas is moderate. This means that the current installed base will not be
overly concerned about the speed of innovation. However, caution is necessary around
contact center solutions and customer care, business work stream collaboration, and video
conferencing, which are markets characterized by fast innovation. Organizations that use
these product types need to ensure they can keep pace with new developments in the
market and with the changing expectations of their customers, employees, and business
partners. Having said that, it is important to point to Avaya's continued R&D spending in
these areas, which often outstrips that of key competitors (as a percentage of revenue).
Is it beneficial for clients to consider other vendors? How disruptive is a forklift
upgrade?
We do not believe most organizations running Avaya UC systems in the middle of their
lifecycles need to consider forklift upgrades. This goes beyond Avaya's restructuring and is
all about forced upgrades of voice infrastructure usually being unnecessary. Today's voice
infrastructure has a long lifecycle, with replacements planned years in advance. As
standardization keeps progressing, interoperability is increasing between voice systems of
different brands and between on-premises systems and hosted services. Providers of
innovative collaborative tools and services, especially when cloud based, are motivated to
ensure the interoperability of their products, and the popularity of hybrid deployments is
growing as a consequence. For example, IDC's European Enterprise Communications
Survey, 2016 revealed that 32.8% of the respondent organizations combine different UC&C
deployment types, while 25.5% use hybrid deployments combining on-premises and hosted
resources.
Organizations today thus do not have to rely on forklift upgrades when planning an
infrastructure upgrade. They can schedule cost-efficient stage-by-stage migrations that allow
them to both sweat their assets and avoid the extra costs of a rushed migration. Hybrid
deployments can be used to cover these transition stages, but they can also act as a
permanent solution to add new functionality while optimizing cost structure. Obviously,
certain situations may still result in a decision for a forklift upgrade. But such cases will be
driven by reasons other than vendor brand issues. The rationale behind these upgrades will
typically be specific business priorities, such as the need to integrate heterogeneous
networking assets during company mergers or a radical switch in financing from capex to
opex.
What will the impact be on channel partners? What are the downsides of pursuing a
multi-vendor approach?
Avaya is a partner-centric organization, which means that a multi-billion-dollar ecosystem has
a huge vested interest in the outcome of the restructuring. In our view, the commitment of the
partner community to Avaya will be a key aspect in terms of shaping the future of the
company. Avaya has largely been successful in ensuring partner loyalty thus far and is still
seen as a key contributor to partner profitability. A lot of the focus during the restructuring has
been on the product side of Avaya's business. However, as noted above, Avaya generates
more than 50% of its business from services, and most of these services are sold through, or
in collaboration with, channel partners. This means that partners need to continue to invest in
Avaya technical certification and their general capability to sell, implement, and maintain
Avaya solutions in a profitable manner.
This does not mean that some partners are not looking to add more UC&C vendors to their
roster. It makes sense to cover any potential downside, but it is also prudent to point out that
UC&C solutions are business critical and not just a collection of infrastructure boxes. It is
essential for partners to understand the solution that is brought to market and to have built up
a decent track record, since UC&C solutions play a key role in shaping customer experience,
which is one of the cornerstones of the digital transformation era in which we live and work.
Channel partners and enterprises run the risk of losing vital best practices and skills by
shifting their focus.
What is the recommended strategy for customers with a major Avaya upgrade due?
The question of restructuring and its effect on customers is most pertinent to organizations
that are approaching the natural end of their Avaya system lifecycle and are considering an
upgrade. In our opinion, it is critical that these customers discuss the future with a solutions
provider they know and trust and cover the following points:
Your professional services partner is committed to continue working with Avaya to
support Avaya products. The role of professional services will remain crucial for UC
deployments. IDC's UC&C forecast shows that professional services (a combination of
support and maintenance, and consulting and integration) will grow faster than software
and equipment sales and will account for 39.9% of total UC&C revenue in 2020. Because
the lifecycle of a communications platform spans many years, it is vital to have a
partner's commitment to support your next system.
You consider pay-as-you-go pricing to minimize risk. Finding as-a-service pricing for
Avaya products may be the best way for you to hedge against product supply and
support issues, as it would minimize commitment to the brand and enable customers to
switch platforms at a low cost. This is the obvious default path for the growing group of
UCaaS customers. However, pay-as-you-go pricing is also available for on-premises
installations and is becoming increasingly popular. Although it may not be the most
obvious choice for your organization, it is still well worth considering.
You have selected a strategy for fast developing products. If you are considering
Avaya products for contact center, customer care, business work stream collaboration, or
video conferencing, one option may be to postpone the decision until the result of the
restructuring is clear. The other option is to design your deployment so that it is capable
of being either upgraded or complemented with other vendors' products should the
restructuring fail or become disruptive to Avaya. You should spend some time with your
service partner discussing a Plan B. For such a plan to work, it is essential that your
voice, video, and UC environment is standards based and that the products used in your
installation provide APIs that can be used by applications.
A B O U T T H E S E A N A L Y S T S
Chris Barnard is vice president, European Telecommunications and Networking, at IDC. He is based in Amsterdam, the Netherlands, and is responsible for enterprise-focused region-wide research, as well as country-specific telecoms research in the Nordics, Benelux, France, Spain, and Italy. With a personal research focus on enterprise transformation and the interaction with infrastructure and lifecycle services (consulting/integration, managed services, and maintenance), Chris is the author of numerous white papers and trade press articles on professional services, convergence, unified communications, ebusiness, infrastructure, and networking strategies. He is widely quoted in the international technology and business press. In 2010, Chris was named telecoms analyst of the year by the Institute of Industry Analyst Relations (IIAR). He is frequently asked to speak at international industry conferences, customer events, and road shows.
Chris joined IDC in 2000. He previously worked for three years at Montreal-based software company Essentus as special projects manager and customer support manager (Europe). Before joining this supply-chain management vendor, Chris was employed by Fast Lane, an Oracle consultancy in the Netherlands. Chris Barnard, who holds a master's degree (cum laude) in social sciences from Stellenbosch University, also has six years' experience as a journalist and editor at various publications.
Michael Vorisek covers markets in the unified communications and collaboration (UC&C) ecosystems of Europe, the Middle East, and Africa (EMEA). His areas of focus include IP telephony, UC&C platforms and equipment, unified communications as a service (UCaaS), and business IP voice services. After joining IDC in 2008, Michael initially focused on the security of telecommunications networks and on fixed business and consumer communications services in Central and Eastern Europe. His focus has evolved to include business communications equipment and services across the broader EMEA region. In addition to his work as an IDC analyst, Michael is a part-time teacher and researcher of the history of sociology. Michael Vorisek studied history and sociology at Charles University, Prague, and social and political science at the European University Institute, Florence. In addition to his native Czech, he is fluent in English and Italian and speaks passable French and German.
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