On Returning Avaya to Glory

by Dave Michels

There were two sets of discussion last week about Avaya. One was the various interpretations related to its 8-K filing. The other discussions were related to the company’s transformation strategy after a briefing with industry analysts. I don’t have a lot to add to the first narrative. There are several online discussions and even a Wall Street Journal article.

Dave and Alan, Morristown, NJ Dec, 2022

This post is about the second narrative, supplemented with conversations directly with Alan Masarek. My last post on Avaya was back in August, when the CEO change was announced. That post covered Chirico’s reign. This post looks at what’s changed in the past five months. 

July 28 was a big day for Avaya. It announced Alan Masarek as its new CEO, and separately warned that it would substantially miss its Q3-23 quarter. About a week later, on August 9, the company confirmed the miss with a loss 2.4 times its revenue. It also disclosed an investigation into its financial reporting, and warned it might not have the cash to pay off near-term bonds. Avaya summarized the news with a “substantial doubt” that it could continue as a “going concern.” Déjà vu again, Avaya spent most of 2017 in Chapter 11 bankruptcy. 

One of the recurring questions I received when Masarek took the position was why he would accept the role. He’s answered it many times, essentially he’s excited about Avaya, and the opportunity to transform what was once a great company. He has never indicated that the situation was worse than he expected. 

Though I suspect he’s had a few surprises. Hiring a CEO takes time, and the situation worsened quickly. It is reasonable to assume the financials were worse than he (or anyone) expected. If that’s true, it hasn’t quelled his passion. If anything, Masarek seems more confident now than when he started. 

I appreciate his excitement. Avaya is a legendary company. It has a well known global brand, an enviable customer base that includes many household names, an extensive partner network, and generates impressive revenue (in its preliminary Q3-23 report it reported revenue of $577 million — down 20% year-over-year). 

Masarek seems to enjoy transformations. When he arrived at Vonage in 2014, Vonage’s legacy home phone segment comprised more than 90% of its revenue, and it was in its sixth consecutive year of revenue decline. Masarek led a transformation at Vonage that pivoted into business communications with UCaaS, CCaaS and CPaaS. Over his six-year tenure as CEO, Vonage saw its business segment grow nearly tenfold to more than $1 billion dollars. Masarek departed Vonage in 2020. Last year, Vonage was acquired for over $6 billion. 

Restructuring the debt is what Masarek calls step five in his five step transformation strategy. The first four steps have progressed simultaneously while the company evaluated its financial options. They are: 1) Product Strategy, 2) Organizational Clarity, 3) Culture and Talent, and 4) Cost Structure. Step five is to address the balance sheet. The company has not made any announcements yet, though it’s likely coming soon. Masarek is not certain if it will be resolved with Chapter 11. However the balance sheet gets resolved, Masarek believes it will be quick as all of the parties have been in active negotiations. 

I will come back to step five, let me first review the other four. By Product Strategy, Avaya has narrowed its focus. There will be many end-of-sale announcements, but specifics have not been made public yet. Product leadership believes the changes mostly reduce overlaps. Two key points made by its product leaders were that the company was distracted with too many product initiatives and that the narrower focus highlights both what the company will and will not pursue. 

Regarding Organizational Clarity, the company has created three go-to-market initiatives: Premises-based (includes Aura and Elite), Cloud (includes ACO and Experience Platform), and Hybrid. The hybrid angle intends to position complementary cloud-delivered services to its single-tenant customer base. Avaya is attempting to provide its customers a path to cloud-delivered services without the disruption of a “forklift” migration. Avaya refers to this strategy as Innovation without Disruption

Regarding Culture and Talent, Masarek wants to make Avaya a “destination place to work.” Masarek believes the keys to accomplishing a cultural transformation are empowerment and communications. He wants employees to understand and appreciate the strategy so they can get behind it. He also tracks qualitative metrics such as attrition, Glassdoor rankings, and employee referrals for hire. 

Regarding Cost Structure, over the past few months, Avaya has identified reductions that will yield a savings of $524 million. Masarek states that most of it has already been implemented, and that he expects the cuts will restore operating profitability. 

That leaves step five, and it’s the wrong kind of cloud hanging over Avaya. The company needs to restructure its debt (again). It appears the market is expecting Chapter 11 though the company hasn’t indicated if or when. Masarek simply states the balance sheet will be resolved inside or outside of a courtroom.  

Masarek believes that the completion of debt restructuring marks the end of the transformation. That’s a bit optimistic. Transformations don’t occur over a few months. The transformation will take years, but Masarek is ready to execute. 

A lot has happened at Avaya since August, but a lot hasn’t. Until Avaya gets past step 5, Masarek is limited in several ways. For example, Masarek has yet to hire any new executives. Several officers have departed, but none have been hired. The company has active searches underway for a CMO, CFO, and CRO, but these positions are unlikely to be filled until the financial situation is clarified. The Interim CFO, Becky Roof, is from AlixPartners, the restructuring advisors that Avaya retained. 

Does the transformation story hold water? Maybe. Step 5 is hard to predict. Corporations are supposed to work in the best interest of their shareholders, but Chapter 11 changes that and prioritizes the debt holders instead. They may have different priorities. Also, shareholders include employees and partners, so the impacts could impact attitudes, morale, and loyalty. 

Assuming all five steps, can Avaya still transform into a great company? I think so. The market demands glorious products, and there’s still time. Let’s start with premises-based and private cloud contact centers. There’s a common perception that these products are obsolete, but that’s not the case. The vast majority of CCaaS wins have been for implementations below 500 seats, and many of Avaya’s customer’s are much larger. 

Last March, in its Contact Center Worldwide Forecast (Gartner ID G00764551), Gartner analysts predicted that CCaaS solutions will grow to “over 49% of installed contact center agents in 2026.” That’s about half the agents in three years. The CCaaS half of agents will be served by a lot of providers including 8×8, AWS, Cisco, Five9, Genesys, Google, NICE, Vonage, and Zoom to name a few. Conversely, the single-tenant half will be served by only a handful of vendors, and that list is getting shorter. 

Last October, Genesys threw Avaya a bone by going “all in” on CCaaS. Although it continues to sell its premises-based solution, the CEO posted that Genesys will focus all of its innovation, investment, and resources on CCaaS. It also ended the sale of its Multicloud CX solutions. Genesys had previously reported that its Multicloud CX solution achieved more than 100% year-over-year growth in cloud and subscription bookings during its 1H22. It also referenced a MultiCloud eight-digit win. Cisco also has little to say about its single-tenant solutions. With Genesys and Cisco both focused on the cloud, Avaya becomes the only major vendor committed to its single tenant contact center future. 

CCaaS is critical to Avaya, and it has a lot of work to do. The Avaya Experience Platform was launched in the fall of 2019 as Avaya IX CC. The solution runs on Microsoft’s Azure Cloud Platform. Over two years later, the solution is still relatively immature. Avaya’s product leaders claim they are now pushing updates regularly under a continuous delivery model. 

The innovation without disruption mantra is smart, and effectively the opposite of what we’ve seen out of Avaya for the past six years. Avaya is communicating the right things, but the devil is in the details, and the details should be coming soon. 

Related: TalkingHeadz Podcast Interview with Alan Masarek.