Remarkable transformation

Relaunching GEC as a `new economy’ communications company has meant a five-year plan of acquisitions and disposals. DAVID FOWLER reports on how Lord Simpson and his team sorted the wheat from the chaff

The vision is bold. Take GEC, a sprawling conglomerate with over 160 subsidiaries making everything from weighing machines to medical scanners, and turn it into Marconi, `new economy’ telecoms and information company able to compete successfully with companies of the stature of Lucent, Nortel, and above all, Cisco Systems.

If it works, it will be one of the most remarkable corporate transformations ever seen. Chief executive Lord Simpson predicted at the launch of the new Marconi in November last year that the new-look firm `won’t just hit the ground running, it will take off as Europe’s brightest technology company’.

When Simpson took over in 1996 as head of the empire built up over 30 years by Lord Weinstock, communication systems took a while to emerge as the focus of the new Marconi. Simpson put in place a strategy of remaining only in markets with strong growth prospects and those in which Marconi could gain leadership.

Telecoms certainly met the first criterion. GEC had developed some good technology in the field. But with its telecoms interests tied up in GPT, a joint venture with Siemens, it was unclear whether it could meet the second.

`We decided we’d only stay in telecoms if we could get out of the joint venture,’ says Jack Fryer, Marconi technology and strategy director. Negotiations to buy out Siemens’ stake were successful and GPT was merged with Italian subsidiary Marconi SpA to form Marconi Telecommunications.

It was clear there were big opportunities. Growth in data transmission was, and is, driving huge capital investment by telecoms companies around the world. With the explosive growth in the internet, data transmission is growing by at least 100% per year. Networks designed for voice transmission are creaking under the strain.

At the same time, former state-owned telecoms monopolies are having to contend with deregulation and new competitors. `There’s a good market for people providing telecoms infrastructure,’ says Fryer. `We decided to make Marconi Communications into a world infrastructure player via acquisitions.’

To do this several gaps in Marconi’s portfolio needed plugging.

Four-layer network

Fryer describes the future data network as having four layers: the transport layer, or how the data travels over the network; access and switching, or how the data gets from an individual phone to the network and is then routed around; services and network management, including such things as voice-over-internet software; and applications, for example, software for e-business.

In transport, Marconi was the world number one in synchronous digital hierarchy (SDH) equipment, the European standard for transmitting data. It also had network management capability. But it had no access products.

To rectify this it bought Reltec of the US for $2.2bn, which not only brought in access equipment but also a foothold in the US market. Similarly, in switching Marconi only had narrow band switching products, made for voice networks. So it bought Fore Systems, also of the US, the market leader in asynchronous transfer mode (ATM) broadband switching, for $4bn. This, too, helped build its position in the US market.

Other acquisitions followed: Nokia’s non-mobile transmission business; Robert Bosch’s public networks, giving a presence in Germany; and communications software house MSI.

Acquiring businesses, especially with GEC’s legendary cash pile inherited from the Weinstock era, is one thing. Integrating them into the new business is another.

`Integration was a key challenge,’ says Fryer. Partly to encourage this, the company’s international headquarters was sited in Pittsburgh, Pennsylvania – the home of Fore Systems. But, as with all mergers, there were potential problems of a mismatch of cultures between the former GEC subsidiaries and the new acquisitions.

`With the acquisitions, you want to keep the benefits of their culture but bring it into a system with controls you recognise. Many of the acquisitions were young start-ups and to impose our own culture on them ran the risk of killing them. We were lucky in identifying some good people in the organisation to take the lead in tackling Marconi’s historical risk-averse legacy,’ says Fryer. `The organisation was great at cost control. If you take the lid off and make risk-taking possible, it’s a really good combination.’

To encourage a new culture, a company-wide programme called The Marconi Way is being introduced across the organisation. Developed from interviews with staff it is described as `a set of shared beliefs that binds us together and drives us forward’.

Some have questioned whether the company is big enough to compete in its chosen markets. Its capitalisation is about a tenth that of Cisco Systems, for example. Fryer says: `If you compare us with Alcatel or Siemens, for instance, they have large legacy – voice and networks – which is static in terms of growth.’ Comparing the companies on the basis of their investment in broadband networks, their sizes are similar.

The exception is Cisco. `They’re doing a lot of things right. We see them as the benchmark. But they have shortfalls we can exploit. There is room for another Cisco, especially as the revolution has barely started in Europe.’

Can Marconi match its competitors’ R&D capability?

`Where everything is changing rapidly, you can’t generate enough research yourself. The old-fashioned central R&D model no longer works.’

Instead, Marconi is developing `knowledge nodes’ where it will be able to tap into a wide range of research. The first is the recently announced facility at Cambridge, where Marconi will be investing £40m in a new centre for telecommunications technology.

The existing GEC research centre at Caswell, Northamptonshire, will be another node, and others are expected to follow in the US and Israel. The company is also moving its UK headquarters to Ansty, near Coventry, creating 2,000 jobs, and linking with Warwick University in the hope of forming a high-technology cluster.

Future strategies

Meanwhile, there are a number of good omens for the future. The company has recently won some important contracts, such as a $1bn agreement with BellSouth in the US to supply optical fibre interface equipment, as part of a drive by BellSouth to provide broadband services. And a contract with Sprint to supply ATM switches made by Fore Systems was significant because it was the first realisation of the potential for cross-selling, Sprint originally being a Reltec customer.

Fryer recognises that finding good people will be one of the key challenges in the future. But, after losing some staff from Fore Systems in the early days, the company is now successfully recruiting, with 30% of recruits coming from personal recommendation of existing employees. A campaign to recruit `leaders for the future’ yielded 3,000 applications from inside and outside the company. Share option schemes have been introduced and there is a $100m venture capital fund to launch R&D spin off companies. `I’m personally delighted our engineers now have the opportunity to become very wealthy,’ says Fryer, himself a trained engineer.

On the technology front, Marconi has developed what promises to be the next big development in data transport: digital wave division multiplexing (DWDM). It promises to extend the capacity of optical networks dramatically. The principle is simple: instead of sending white light down the fibre, DWDM allows multiple colours, so that, say, 100 channels can be sent down one fibre simultaneously and separated at the other end: a much more cost-effective way of expanding capacity than laying extra fibres.

Fryer admits that there is still work to be done on convincing the financial markets of the effectiveness of the company’s transformation. `There’s still some time to go. Investors respond to performance and we’ve not been in existence long enough yet. Our credibility will rest on producing results in line with forecasts.’

But as one analyst says: `The results to the end of March this year were pretty good, so that people are beginning to think maybe there is something to this. Integration, especially at Fore, went slowly at first. But the contracts coming through since then imply some success. Customers are lining up for DWDM.

`They are competing successfully with Nortel and Lucent, which are more US-centric. Cisco is in a position of strength in the core router market, and Marconi would find it quite a challenge to compete there. But equally Cisco would find it pretty tough to get into the SDH or DWDM market.

`The game is out there to be played. There are plenty of opportunities for everyone. The key question will be can they bring their next generation of products to market on time and ahead of the competition?’