Sometimes, technology modernizes faster than the companies that support it.
When business communications and collaboration company Avaya filed for Chapter 11 restructuring in January, despite having "strong financial results," according to John Sullivan, CFA, VP and Corporate Treasurer for Avaya, it sent ripples through the technology community.
Avaya, which offers internet telephony, wireless data communications and customer relationship software, was born in more hardware-dependent days. But as businesses moved from hardware-based computing to cloud-based computing, Avaya fell behind.
Avaya’s bankruptcy is evidence that no matter the size, all companies are subject to changes in the market and strong, steady competition.
Now, as Avaya works to restructure, it serves as an example of how the corporate communications/collaboration space has evolved over the years and how companies that provide those services have had to react quickly or risk an uncertain future.
Today’s collaboration market
The business communications and collaboration market includes a variety of business tools, such as enterprise voice, UC applications, telepresence, email software, enterprise content management, enterprise social networks and hosted/cloud communications and applications, according to Synergy Research Group.
Despite many changes in the market over the last few years, the business communications and collaboration market remains lucrative. Total revenues from collaboration surpassed $9 billion in 2016, and Cisco grew its market share by 15% in Q4 alone, according to data from Synergy Research Group. Microsoft came in just behind Cisco, with Avaya and IBM in a virtual tie for third. Other major players in the market include AT&T, Verizon, Citrix, Polycom, Mitel, UNIFY and ALE.
So why is Avaya struggling while Cisco is thriving? Some of it has to do with the speed at which Cisco moved from on-prem collaboration solutions to cloud-based solutions. As customer demand for cloud solutions grew, some vendors responded and others didn’t.
"There [has been] a definite shift in end user costs," said Terrel Bird, CEO and co-founder of TCN, Inc. "Organizations of all sizes are looking for the flexibility and cost savings that cloud platforms provide."
But while Cisco embraced the cloud, Avaya placed big bets in other areas, according to Derrick Monahan, Practice Lead, Unified Communications at World Wide Technology, a company that now finds itself at times helping Avaya customers migrate to Cisco. "Instead of partnering out and looking at different areas where the growth was, Avaya built their solutions internally from the ground up."
Meanwhile, businesses adopted a more agile, cloud-based, collaborative work environment and moved away from working in the types of larger, slower-moving teams Avaya built its products around.
"There [has been] a definite shift in end user costs. Organizations of all sizes are looking for the flexibility and cost savings that cloud platforms provide."
CEO and co-founder of TCN, Inc
"Avaya didn’t have the breadth and scope that some of the other vendors had, whether that was unified communications, video systems, web conferencing, team collaboration or contact center," said Monahan. "Avaya was also late on the cloud solution. They are working on this now but Cisco has been the long-term leader and innovator in that space, which has made companies rethink where they plan to invest in the next 5 to 7 years."
Avaya is making changes. According to Sullivan, in a letter on Network World, filing for Chapter 11 will help the company "transformation from a hardware company to a software and services company."
Already, Avaya earns 75% of its revenue from software and services and has largely moved on from its "heritage" as a hardware company. But, Sullivan said, the company's capital structure was put in place "10 years ago to support a hardware-focused business model."
Because it can’t catch up to its competitors under its current operating model, Avaya hopes filing for Chapter 11 will help get it back to a place where it can compete against startups and others that adapted to change faster.
What does the future hold for Avaya?
Though Avaya's future is still unclear, pulling out of Chapter 11 is certainly not unheard of.
Last year, Aspect, a provider of software systems and equipment for call centers, filed Chapter 11 as it sought to reduce its $795 million debt burden. At the time of the filing, Aspect’s CEO said his company had "incurred downward revenue pressure in part because of the high costs of adapting to another technology platform."
Approximately five months later, Aspect pulled out of bankruptcy, having reduced its long-term debt by 40%. Aspect is a good example of how a restructuring can be done quickly and with little to no interruption to service. But it may not be easy for Avaya.
"The sheer size and debt load of Avaya makes their situation more challenging, not to mention the current state of the telecommunications industry and its competitors are not making Avaya’s resurgence any easier," said Bird.
"Avaya knows that one of the primary results of digital transformation is a flattening of the silos across an enterprise, giving way to faster, automated, more intuitive communications."
SVP of Corporate Strategy & Development and CTO at Avaya
Clearly, Avaya will need to adapt its approach to the market, and the company is well aware of that, according to Laurent Philonenko, senior vice president of Corporate Strategy & Development and CTO at Avaya.
"Avaya knows that one of the primary results of digital transformation is a flattening of the silos across an enterprise, giving way to faster, automated, more intuitive communications," said Philonenko. "We need to continue to stick to what we know as we evolve our portfolio for this new world: our solutions need to be open, flexible, scalable, cloud-enabled, mobile-focused and easily integrated with any third party or competitor solution."
"And we know that successful enterprise digital transformations begin with the deployment of transformational solutions — not doing just basic upgrades — for communications and collaboration," Philonenko said.
Bird says its too early to predict whether Avaya will be able to restructure in time to bounce back to its former glory. "Avaya needs time, money and strategic acquisitions to survive — and some of these they don’t currently have," said Bird.
Meanwhile, changes at Avaya are likely to be good for cloud competitors. "Given Avaya’s situation, it’s likely that businesses across all markets will take a second look at contracts and business continuity plans," said Monahan. "As far as smaller cloud providers, I think they are positioned well to benefit from the Avaya news."