Avaya (A): How to Go to Market? Custom Case Solution & Analysis

Evidence Brief: Avaya (A) Case Analysis

1. Financial Metrics

• Total Revenue: 7.7 billion dollars in fiscal year 2000 (Case Exhibit 1).
• Operating Income: Loss of 70 million dollars in 2000 compared to 535 million dollars profit in 1999 (Case Exhibit 1).
• Revenue Mix: 75 percent of sales generated through direct channels; 25 percent through indirect channels (Paragraph 4).
• Target Goal: Shift to 50 percent or more indirect sales within two to three years (Paragraph 8).
• Market Share: 26 percent in the United States PBX market (Paragraph 12).

2. Operational Facts

• Headcount: 30,000 total employees globally (Paragraph 3).
• Sales Force: 1,500 direct sales professionals and 2,500 service technicians (Paragraph 15).
• Channel Partners: Approximately 2,000 BusinessPartners including Value Added Resellers and Distributors (Paragraph 18).
• Product Portfolio: Enterprise voice communications, call centers, and data networking equipment (Paragraph 10).
• Legacy: Spun off from Lucent Technologies in September 2000 (Paragraph 2).

3. Stakeholder Positions

• Don Peterson (CEO): Focuses on reducing fixed costs and increasing market reach through partners (Paragraph 7).
• Direct Sales Force: Concerned about commission losses and competition from the channel for large accounts (Paragraph 22).
• BusinessPartners: Require clear rules of engagement and protection from direct sales poaching (Paragraph 25).
• Pat Russo (Chairman): Emphasizes the need for a lean organization post-spin-off (Paragraph 5).

4. Information Gaps

• Specific gross margins for the direct versus indirect sales of specific hardware units.
• Detailed attrition rates of the direct sales force during the transition period.
• Customer satisfaction scores comparing direct service versus partner service.

Strategic Analysis

Core Strategic Question

• How can Avaya restructure its go-to-market model to achieve a 50 percent indirect sales mix without cannibalizing enterprise revenue or alienating the internal sales force?

Structural Analysis: Value Chain and Market Forces

The internal value chain of Avaya is weighted heavily toward high-touch sales and service, creating a fixed cost structure that is unsustainable in a maturing PBX market. Supplier power is high for specialized components, while buyer power is increasing as customers demand integrated data and voice solutions. Rivalry from Cisco and Nortel necessitates a more agile distribution model. The current conflict between the direct sales force and BusinessPartners functions as a primary bottleneck to growth.

Strategic Options

• Option 1: Hard Segment Demarcation. Assign the Global 2000 accounts exclusively to the direct sales force. All other mid-market and small enterprise accounts move exclusively to the channel.
  Rationale: Eliminates overlap and conflict.
  Trade-offs: Limits the upside for ambitious partners and risks underserving large accounts with local needs.
• Option 2: Channel Neutral Compensation. Pay direct sales representatives the same commission regardless of whether a deal is closed directly or through a partner.
  Rationale: Encourages the direct sales force to support partners instead of competing with them.
  Trade-offs: Increases the total cost of sales in the short term.
• Option 3: Selective Product Gating. Reserve high-complexity software and integration services for direct sales while moving all standardized hardware to the channel.
  Rationale: Matches organizational capability to product complexity.
  Trade-offs: Partners may feel relegated to low-margin commodity products.

Preliminary Recommendation

The recommendation is to implement Option 2 (Channel Neutral Compensation) combined with a clear account registration system. This approach preserves the expertise of the direct sales force while removing the financial incentive to block partner growth. It addresses the immediate cultural resistance within the organization.

Implementation Roadmap

Critical Path

• Month 1: Finalize the Rules of Engagement document and distribute to all 1,500 sales professionals.
• Month 2: Launch the Partner Portal for lead registration to prevent dual-entry and account disputes.
• Month 3: Roll out the new compensation structure that rewards direct reps for channel-led fulfillment.
• Month 4: Conduct regional training sessions for the top 200 BusinessPartners on new software integration.

Key Constraints

• Sales Force Culture: The transition from hunters to facilitators is a significant psychological shift for veteran reps.
• Technical Competency of Partners: Many VARs lack the depth to handle complex multi-site unified communication deployments.
• IT Infrastructure: The existing CRM must be updated to handle complex multi-channel lead tracking and commission splitting.

Risk-Adjusted Implementation Strategy

To mitigate execution risk, Avaya will establish a Channel Conflict Resolution Office. This body will adjudicate all disputed leads within 48 hours. Furthermore, the company will implement a phased rollout, starting with the North American market before expanding to international territories. This allows for refinement of the compensation math before global deployment.

Executive Review and BLUF

BLUF

Avaya must transition to a partner-led model to survive. The current 75 percent direct sales dependency creates an unsustainable cost base and limits market penetration. Success requires immediate implementation of commission parity for direct sales reps to eliminate channel conflict. By rewarding internal staff for partner success, Avaya can reduce fixed overhead while maintaining the high-touch service required by enterprise clients. The transition must focus on the mid-market where the reach of the channel is superior to the direct model. Failure to act will result in continued market share loss to more agile competitors like Cisco.

Dangerous Assumption

The analysis assumes that the 2,000 BusinessPartners possess the technical capability and financial stability to represent the brand of Avaya without significant corporate oversight. If partners fail to deliver service quality, the brand equity of Avaya will erode rapidly.

Unaddressed Risks

• Talent Flight: High-performing direct sales representatives may move to competitors if they perceive the new commission structure as a cap on their earning potential. Probability: High. Consequence: Loss of key enterprise relationships.
• Margin Compression: Increased reliance on distributors and VARs will inevitably reduce gross margins. If volume does not increase sufficiently to offset this, the operating loss will widen. Probability: Medium. Consequence: Financial instability and investor withdrawal.

Unconsidered Alternative

The team did not evaluate the possibility of a complete divestiture of the hardware business to focus exclusively on software and services. A software-only model would naturally align with a 100 percent indirect distribution strategy and eliminate the logistical burden of hardware manufacturing and storage.

Verdict

APPROVED FOR LEADERSHIP REVIEW