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Speed and more speed is the key to integrating Nokia with Siemens

01 February 2008

It's nearly a year since the networks operations of Nokia and Siemens came together, and the company has had to move faster than it expected, says CEO Simon Beresford-Wylie. Its heart remains in Finland and Germany, but increasingly the business is in Asia, he tells Alan Burkitt-Gray

Simon Beresford-Wylie: NSN needs to help its customers achieve a dramatic growth in traffic without extra revenue

The merger in 2007 between Nokia Networks and the network communications division of Siemens took longer than expected to get started but now, says the CEO, it's moving faster than planned.
The creation of Nokia Siemens Networks, announced in the middle of 2006, was due to be formalised from January 2007. It wasn't, leaving Simon Beresford-Wylie hosting a booth and both customer and press events at 3GSM in Barcelona the following month as a CEO-designate, still not an official CEO, of a merged company still not officially in existence.
The not-quite-ready Nokia Siemens Networks was able to give an indication of its future product strategy at the February 2007 event.
That changed from April 2007, after Nokia had satisfied itself about the problems that were emerging from the long-running corruption scandal in Siemens.
Since then the pace has been fast, says Beresford-Wylie. There was even some benefit in the delay, he suggests, because executives had a huge amount of planning to do during the pre-merger period.
"We went through a wonderful planning phase, which was delayed by a quarter," he says. "By the time we got to April 1 we were almost all planned out."
In theory, anyway. "What looked like beautiful plans on paper, when you got to the implementation, were not necessarily as good as you think they were going to be," he says in retrospect. "There is a need for a course correction. We've been doing some of that to make sure we don't have heavy bureaucracy or too much centralisation."
Now, he says, one of the key lessons of that time is the need for speed. It's a lesson that is "probably true of any company that's going through such a large integration", he adds.

Consolidate, leverage, transform

"When we put our plan together there were three elements — consolidate, leverage and transform."
Stage one was consolidate the business, get it integrated, get it restructured. Then "leverage our assets", its presence in each country and its portfolio. Then transform.
"We thought consolidation in 2007-2008, start the leverage in 2008 and take it to 2009, 2010, and then when we've got through this we can move gently into the transformation towards solutions and software and services."
That leisurely schedule was torn up within months. "We got to the end of the second quarter and decided that wasn't the way it's going to play," he reports. He and his colleagues decided instead that they needed to do "all of this at the same time".
And so now, asked to summarise what he's have done differently, he says: "Speed, speed and speed. But we are speeding up now."
In more detail: "We're speeding up our integration, our restructuring, and putting a huge amount of focus into the transformation as well, which is reflecting what's happening in our customer environment."
Nokia Siemens Networks — the name is long and still isn't naturally abbreviated to NSN — needs "to become a lot more solution-oriented, a solution company", he says. It needs to help its customers "master the dramatic growth in traffic that's coming without a lot of extra revenue".
The first few months after the official creation of the merged entity in April 2007 were also, shall we say, challenging. The second quarter of the business year, but the first of NSN's existence, was "very difficult", says Beresford-Wylie. "The third quarter showed turnaround."
But that period was clearly unhappy for all concerned, and it seems that both Nokia and Siemens were wondering if they'd done the right thing.
Nokia CEO Olli-Pekka Kallasvuo "said he wasn't happy with the results" at the end of the second quarter, says Beresford-Wylie, and before the third quarter results were out Peter Löscher, who'd just been brought in to clean up the rest of Siemens as new CEO, said he was disappointed with performance.
"If you look at the language we've all been using", everyone was disappointed, says Beresford-Wylie. "He externalised something that was a statement of fact — none of us were happy with the second quarter. But that was a comment made at a point in time."

More positive

Since then both Nokia and Siemens are making much more positive noises. In January Löscher told reporters that Siemens is now happy with the development of NSN, which is performing well in a difficult market, he said. Kallasvuo is also said to believe good progress has been made, though more remains to be done.
"It's the shareholders' prerogative to say what they feel," says Beresford-Wylie.
So is he happier? Savings through synergy have started to take effect, he says. "Our operating expenses have come down well. We've closed around 200 buildings, as an example."
And the company has negotiated with its 25 top suppliers — representing some 40% of its procurement budget — and pointed out that "we're a new company, and we buy more from you," he says. "We'd like to discuss what we buy and how much we pay for it."
NSN has additional scale "and that means more buying power", he adds. "So it goes through the whole value chain."
There were other challenges in the merger: new processes are needed, IT systems need to be merged — and at the same time disentangled from those of the two shareholders. People need to be put into a new structure, and a new human resources system is needed to approve the structure.
Inevitably, there are hiccups. Emails to someone who was or might not find them and might get bounced back to the sender. It's is all "more complicated than it looked on paper", says Beresford-Wylie. "We've taken a lot of feedback — very open, robust feedback from teams."

Robust feedback

And when he says robust, you can imagine he means robust. He was impressed with the IT department: "On April 1 the intranet was there, the email was there", he says. "We're getting the IT systems in place far more quickly so we can get to a global lean operational mode faster than we had envisaged."
But a more than once in the interview he mentions "HR approvals", and one can imagine a few robust comments on the lines between Siemens' headquarters in Munich and Nokia's in Espoo, near Helsinki, about the process of getting the right people in place.

Simon Beresford-Wylie

CEO of Nokia Siemens Networks since the merged company came into existence officially in April 2007

UK born, dual UK-Australian citizen
BA degree in economic geography and history from the Australian National University
Graduate of the executive development program of Stanford University/National University of Singapore
General manager of Telstra's banking and finance, corporate and government business unit 1993-95
CEO of Modi Telstra India 1995-98
Joined Nokia in 1998, first as director of business development in Asia Pacific
Managing director and area general manager, Nokia India 1999-2000
Senior VP of Nokia Networks and CMO, 2002-03
Senior VP of Nokia Networks, Asia Pacific, 2003-05
Executive VP and general manager of Nokia Networks and executive board member of Nokia since February 2005

And the business systems: "Frankly during that first quarter it was very difficult just having visibility to the business — what's actually happened with sales and margin and so on," he says. "That we're speeding up."
Internal communications weren't all they should be, he says. "We've spent a lot of time communicating," he says: "The feedback we get consistently is that we're just not doing enough. You just have to communicate, communicate, communicate."
This has to be face-to-face. "It's not enough to do emails and webcasts. It's about getting out and meeting with thousands upon thousands of people. One could always do a better job and we feel that we could do a better job, that we should have done a better job and that we will do a better job. I don't think we've done a bad job — we feel that we need to lift it up another notch."
Did that affect customers? Beresford-Wylie thinks not. "We track very closely our customer loyalty and customer satisfaction. I can say, hand on heart, our customer loyalty results we have seen during the last couple of quarters as a new company have been higher than either company achieved as a standalone. That has come as a very pleasant surprise."

Systems complexity

That is because "our teams have worked very well to mask the complexity of the systems issues, the order processing, all those sorts of things", he says. "We haven't lost any execution rhythm, or delivery capability rhythm."
What about the details of actually merging the product portfolios of the two parents? Not a problem: that "went surprisingly well, went very smoothly", he says.
"We didn't have a lot of overlap. We didn't have a lot of geographic overlap, so we didn't have to wrestle with that. The decisions we were able to make were relatively straightforward on the portfolio."
Beresford-Wylie, 50 this year, is a British and Australian citizen who worked for Nokia since 1998, after spending a long time in the Australian incumbent Telstra — where he helped to launch one of India's first mobile operators, as a joint venture with a local company.
So, as a British Australian, what about the cultural challenges of integrating a Finnish company with a German company?

Difference or similarity

"What we realised when we put these two companies together is that it's more than Finland and Germany, it's more than Nokia and Siemens. It's also fixed and mobile."
It's more than that: "If you look at what's happening with our sector, and the speed of change, then actually the bigger risk to our company is not the cultural difference but the cultural similarity."
The problem is, he says, that "we're probably about 90% the same", he says. "People tend to focus on the 10% difference rather than the similarity."
The similarity stems from the fact that both Siemens and Nokia are "traditional telecom infrastructure companies with their roots in Europe, dealing with an operator community of a particular type".
And that isn't necessarily right for new markets, for the shift to all-IP systems, for the wish for converged services. "The 10% difference is the thing that you deal with in the present day, but taking a three-to-five year view that's also an issue."
That takes us naturally to where the company is going. "The fact is that the market is shifting dramatically," he says — towards India, China, Latin America, the Middle East and Africa.
"So when we look at our product development, when we look at our research and development, when we look at where we put various functions we need to be more balanced. We need to be a global company rather than a European company that does business globally."
And NSN has acted on that already, he says. "We've appointed Rajeev Suri as our new head of services. We're going to hub the services business out of India. It's not just about cost, it's about getting close to a market where a lot of innovation is coming from now."

Head of services

Suri, with Nokia since 1995, became head of NSN in the Asia-Pacific region when the merger took effect, but became global head of services in August 2007.
"If we look at product development, architecture development, India and China are markets together of 2.5 billion people," says Beresford-Wylie.
"People tend to think of cost, cost, cost. No it's not, it's about market proximity. That is one of the points that's very much in our mind in terms of transformation."
One third of NSN's employees are in Finland and Germany, but "the market is not in Finland or Germany, or Europe or America", he says. "It's actually increasingly in India, China, Pakistan, Bangladesh, South Africa, Brazil and so on."
But that's a particular challenge for any company based in Europe or North America, because it has to compete with vendors that are rooted in those markets — particularly China — and have a deep-seated presence there. How does Beresford Wylie plan to cope with that vigorous competition?
"The first thing is we have to be competitive," he says. "Our cost base has to be competitive — our research and development costs, our operational expenses, the things that we procure, the products that we make."
NSN has "a significant and growing presence" in India and China, he points out. "We announced a $100 million investment into India, in manufacturing, bolstering our research and development. We've announced an increase in our R&D in China, specifically in Chengdu. We are manufacturing in both countries, we do significant R&D in both countries. We need to be there and we need to have a competitive cost base. That's the first thing."
But there's also innovation, he says. "We're not going to be a Chinese or Indian company — we will be a global company and we will always have a very, very, very significant presence in Germany and Finland. We're not about to shut up shop here. We have a very large presence and so it's really to the business units and the R&D to out-innovate the competition."
That's a challenge for the Germans and the Finns and the other Europeans in NSN. Let's be basic about this: what are the benefits of being in Finland and Germany apart from the history of the company?
"There are a number of things," says Beresford-Wylie. "A strong innovation capability in Finland and Germany. The expertise around optical, around RF engineering, around intelligent network development."
There is "an ecosystem of universities and standardisation and innovative operators here that are important", he adds.

Heart and soul

"And I think every company has to have its heart and soul somewhere. Our heart, our soul, our 300 years of history are rooted in these two countries as well. So we have 140 years of history from Finland and 160 from Germany in terms of Siemens and Nokia. That provides an emotional anchor and also a very strong value base with which to build a company and one needs to be cognisant of that."
And — despite what some might say — they can be manufacturing centres, he asserts. "We manufacture a lot in these countries. Manufacturing is a very automated process. These countries are well connected to the rest of the world in terms of transport infrastructures. There's a lot here."
NSN is not standing still. Within months of the merger, the group agreed to take over US carrier ethernet company Atrica. Just as that deal was about to close, in early January 2008, it agreed to spend €140 million on Apertio, a UK company which provides subscriber data platforms and applications.
Apertio will become a new business line within NSN's converged core unit, to be headed by Apertio CEO Paul Magelli, but the interview with Beresford-Wylie took place before that deal was announced.
So what's the background? "If you look at the vision for the telecoms world in 2015, we're talking about five billion connected people, and this will lead to a increase in traffic in the next seven to eight years," says Beresford-Wylie.
"Clearly the operator revenues are not going to grow a hundredfold — most analysts would suggest a few percentage points: so, a huge growth in subscribers, a huge growth in traffic." How do operators build a business case to haul that traffic around?
"We have a view of the architecture," he says. "We have to simplify and flatten the architecture, from the core through the transmission into the access networks, fixed broadband or wireless broadband. We're working very hard on that."

Carrier ethernet

Ethernet will push out further and further to the edges. The Atrica acquisition is about putting money where this needs to go — carrier ethernet, mastering this hundredfold increase in traffic and boosting our capability to tackle the innovation challenge and make us competitive.
Does that mean there was a gap in Nokia's and Siemens's capabilities? As far as Atrica is concerned, more a gap in Nokia, he implies.
Siemens "brought a tremendous asset in terms of transport" and it "had been investing in carrier ethernet — their vision was in carrier ethernet", he says.
Nokia Networks had "grown up in mobility", he adds, and "we hadn't fully appreciated what was coming our way with this growth in data".
NSN is learning this lesson: "The transport business is a growing business, we're focussed on that," he says.
That means next generation broadband, both wireless and fixed, including passive optical networks and WiMax as well as HSPA. There is some "sharp R&D there", he notes.
At the same time the company is looking at the operational and business support systems — a hint at the Apertio deal that was still to come, perhaps. "We need to manage all the complexity in networks. We need to do that organically and, as we execute our strategy, we have the opportunity to buy."
But like other vendors — primarily the Western vendors Alcatel-Lucent, Ericsson and Nortel — NSN is starting to develop its activities in managed services and other outsourcing. Beresford-Wylie wouldn't say what share of the company's business this sector accounts for, "but let me put them into four categories".
One and two are to install "what we sell" and then "care for it", he says. Beyond that there are "two new developing areas", he adds.
First, consulting and system integration, "consulting our customers about business processes, working on energy management, security — very big issue, a very fast growing section".

Managed services

And then "managed services, clearly growing faster than the market generally", he says. NSN is "probably remiss in pointing at just how successful we have been", he adds, citing deals with Deutsche Telekom and 3 in Austria, Bharti, Vodafone in India, Vodafone Australia and Telemar Oi in Brazil among "160 managed services relationships".
And India is the centre of that business, not because India is cheap but because "operators in India are working at such an efficient and low cost way", he says. Hence the appointment of Suri to run NSN's services, "based in India because of the learnings and experience we've been able to develop there. There are learnings we can take out of there, practice and tools." There is "a lot of innovation around managed services in India."
And NSN has "a good global network operations centre there too", which the company "will be looking to leverage".
But the Indian market is different for NSN than markets in Europe, he says. Typically, in India, "we go in and design the network, we roll the network out, we integrate all of that and then we manage it, and we manage the whole constellation of services around it", he says.
"It's quite a different scope" from the "box provision" business model. But "if operators come to us from other markets and would like to have a similar relationship, let's talk managed services".
In India "there is an extra competitive dynamic", he says, because of "the sheer size of it".
It's "a China-like market that started five or six or seven years after China", and since then "everybody has been diving in there". By 2000 there were only five million mobile customers in India: "Now they're adding eight million a month."

Solutions company

So what we're seeing as a result is the opportunity "to transform into a true solutions company", says Beresford-Wylie: "not just to be another me-too telecom infrastructure company that is providing very fine boxes, but just boxes".
The challenge is "really understanding where the market needs are, where the customer needs are and becoming more solution oriented", he says. "Behind that there is a massive transformational requirement. If we can do that it gives us a certain differentiation relative to those new emerging companies that are more commodity oriented in their business model. That's the big opportunity."
But what's the biggest threat to Nokia Siemens Networks? "That we don't have the speed in terms of execution, in terms of transformation."
Back to speed. That's what you need with a merger: speed, speed and more speed.  GTB