October 2000

BY MARY BRADSHAW

Business customers are eager to take advantage of converging voice and data technologies. But they are frustrated by a marketplace that seems overpopulated with manufacturers, distributors, software developers, carriers, and consultants specializing in different elements of a networked solution, rather than offering a single source for design, installation, and service.

The MultiMedia Telecommunications Association (MMTA) has represented the channel community for 30 years, always promoting the successful delivery of new technology-based solutions to the business community. With the proliferation of technology and players in the marketplace, we believe that for businesses to benefit from serving their own customers through integrated systems, they must have easy access to local technology partners that offer the advanced skill sets to establish the applications their customers need to make their business more profitable.

TWO MODELS FOR CHANNEL PARTNERS
This article explores one approach for building a team with convergence solutions skills -- the merger and acquisition strategy, portrayed here as pursued by Expanets, Inc., a large and fast growing networked solutions provider for mid-market businesses in the United States. The second article in this series (coming in December) will explore the formation of alliances with companies that do not change the ownership of the distribution company but still provide the professional services customers demand. MMTA sees enormous opportunities for companies pursuing either approach, but enormous risks for companies that pursue neither.

DEMAND FOR PROFESSIONAL SERVICES
Overall spending on services in support of voice and data equipment is projected to expand at a compound annual rate of 19.5 percent through 2003 to reach $237.1 billion, more than double the projected $112.6 billion equipment market for 2003, according to findings from the 2000 MultiMedia Telecommunications Market Review and Forecast, a study released jointly by the MMTA and the Telecommunications Industry Association.

"Eager to use new technologies to improve customer interactions, businesses need professional integration and consultation services," says Arthur Gruen, principal author of the study. "Companies that sell communications technologies will not be paid for distributing products. They must concentrate on the true value they add to the customer: professional services, higher-end applications, and for being a single point of contact for the complex array of network services."

CONSOLIDATION STRATEGY
Founded less than three years ago, Expanets is a $1.4 billion company positioned nationwide to deliver voice, data, and video solutions, including network design and consulting, unified messaging, call center applications, and Internet/Intranet technologies -- via a single point of contact. Standing for EXPerienced At NETworked Solutions, Expanets is targeting a market that it considers to be fragmented and underserved. These are businesses with little or no integrated technologies staff frustrated by the time and expense of working with a collection of different vendors. Expanets' goal is to simplify the sale and provisioning of communications technology and service.

MARKET NEED
Specializing in low-fare and discount airline tickets, Cheap Tickets needed to replace an overloaded call center phone system with a new solution that could keep pace with the rapid growth of the company, improve operator response, decrease the number of lost calls, and provide immediate access to customer records -- all without a break in communications. Expanets provided a 1,500-line NEC NEAX 2400 IMX PBX integrated with a Periphonics IVR system and the GeoTel intelligent call routing platform with SS7 signaling to AT&T, all communicating via the InfoLink computer telephony connection.

As explained by Darci Benesh McGrath, marketing coordinator for Expanets, "As the sole vendor, we enabled the customer to obtain a fast and flexible call center upgrade. We eliminated the confusion of multiple project managers while adhering to a very tight project schedule. There was never a question of who had the ownership of which part of the solution. With the integration of voice and data by a single source, we could make all the pieces of the solution fit."

Quad Research, a supplier of infrastructure hardware for ISPs and ASPs, is moving from four years of research and development to product launch. The company believes that in order to appeal to the dot-com market, it must dazzle customers with a flashy, futuristic Web site. Expanets leveraged its experience using Web sites as avenues for customer interaction to become the coordinator of Quad Research's Web site redesign.

"We needed to build a completely engaging site that leaves our visitors with the firm belief that we offer technology that leads the pack," said Mike Pagani, vice president of marketing, Quad Research. "If you visit www.quadresearch.com, you'll see an introductory sequence that rivals the best on the Internet. The sound, images, and text offer a truly unique experience and portray our company with precisely the cutting edge we need."

According to Pagani, a single Expanets contact coordinated the work of a creative team that included an animator from Hollywood and a graphic artist from Italy. And Expanets provided the bandwidth management expertise to make the sequence accessible to visitors with only 56K modems. Now that the introductory sequence is done, Quad Research is working with Expanets to redesign the rest of its site, complete with rotating 3-D images of products and a unique site navigation system.

According to Christopher Younger, Expanets' executive vice president, corporate strategy and marketing, mid-market businesses like Cheap Tickets and Quad Research "do not have the internal resources adequate to manage their communications needs, which in most cases are as complex and important as their larger competitors that do have internal IT and communications staffs."

In addition, with the advent of the Internet and broadband technologies, networking and communications are becoming much more important to the competitiveness of these companies. As a result, they are making larger investments in their communications and network infrastructure and applications. "Add this to the growing complexity and proliferation of offers in carrier services, hardware, and applications, and the appeal of a single vendor with national resources is clear -- Expanets helps companies navigate between their business problems and the technology that is available," Younger said.

CHANGING TECHNOLOGIES AND CUSTOMER NEEDS
Expanets was founded in February 1998 by NorthWestern Corporation, which originally was an electric and natural gas utility. In the mid-1990s NorthWestern determined that to succeed in a restructuring utility marketplace, the company would need to expand into complementary customer-focused services business. When NorthWestern decided to pursue its growth strategy, its investment arm -- NorthWestern Growth Corporation -- began making strategic investments in businesses that are linked to, and have direct contact with, customers. It invested in Blue Dot, one of the largest national providers of air conditioning, heating, plumbing, and related services. It also invested in CornerStone, the nation's fifth largest retail propane distribution entity. NorthWestern Growth then decided to launch a communications business and investigated all of the options--wireless, CLECs, paging, long-haul fiber optics, etc. The company settled on the telecommunications equipment and service distribution (interconnect) business.

NorthWestern Growth was attracted to applications that allow companies to "touch" their customers, associates, and business partners via voice, e-mail, text chat, fax, call back, form fillers, IVR, CTI, database integration, messaging, telecommuter products, and more. It focused on the interconnect portion of the market because it saw the delivery of voice and data systems to small and mid-sized business to be highly fragmented -- serviced by isolated companies scattered across the country, with no one achieving dominant market share. NorthWestern Growth saw an opportunity to consolidate and transform the mid-tier market. The organization defines the mid-tier market as companies with 20 to 4,000 end users, with the target "sweet spot" of companies having 50 to 500 employees.

So, NorthWestern Growth launched Expanets, which embarked on an interconnect acquisition strategy in 1998. It sought out businesses that had penetrated the target market, met its financial requirements, employed the necessary management talent, and demonstrated customer loyalty. Expanets purchased 20 interconnects around the United States, including MMTA Board members KLF Business Communications Systems, ATS Telephone and Data Systems and Nexus Integrated Solutions, and six companies with skills outside of the interconnect core competencies, such as e-business development, as well as experienced IBM and Hewlett Packard solution providers.

DELIVERY CHANNEL
Expanets' consolidation strategy gives its sales force an advantage over local, solitary distributors who may not be able to make the necessary investments in infrastructure, knowledge and employee development to compete. "As a national $1.4 billion enterprise, Expanets is able to make significant investments in understanding the overall communications market," says Younger. "We acquired what we determined to be the best companies in the industry, bringing along the most talented people in the industry.

Among the first companies acquired by Expanets was KLF Business Communication Systems of Fort Wayne, Ind., the largest networked solutions competitor in the state. Dave Lear, former owner and chief executive of KLF and now president of the midwest region for Expanets, said, "I knew that to participate in the convergence market, KLF needed to attract and retain the best and the brightest professionals with the skill sets in great demand throughout the industry. But KLF did not have the resources to acquire these folks and offer them a sufficient career path or opportunity for growth. By joining Expanets, we were able to join a team that can offer employees the coveted career path and customers the sophisticated services they require."

The design of Expanets is to be a national organization (negotiating vendor agreements, establishing marketing policies at the national level), with locally deployed operations (service, sales and support). When a customer contacts an Expanets office, the local sales representative assesses the needs of the client and applies local employees to the project. As the single contact for the customer, the local rep taps into the national network of Expanets employees when other expertise needs to be brought in.

Global InterNet Associates, an Internet consulting firm and application developer, had outgrown its local market in Lancaster, Penn. After exploring the investment capital options, the employees chose to sell the company to Expanets. Now, the team is serving businesses across the Expanets national client base. "With the support of the Expanets 'brain trust' of professionals, we're completing projects on time, for a fixed price, and to our customers' precise specifications," said Curt Tomlinson, president of the Expanets Internet Services Strategies Group and former president of Global InterNet Assocates.

"We must not underestimate the changes in the distribution channel that Expanets is driving," said James R. Walker, president and chief executive officer. "We're creating a larger, more consolidated national channel for communications services to the mid-market that is more capable than local businesses of servicing a customer's entire communications needs. We are a national business with locally deployed operations that are closest to the customer. Changes are occurring in the technology market that require companies to invest more in understanding the marriage between technology solutions and customer problems. As the largest player in the market, Expanets is ideally positioned to make this investment manageable and successful."

In April 2000, Expanets purchased the Lucent Technologies Growing and Emerging Markets (GEM) division. This acquisition made Expanets the largest integrated solutions provider for small and mid-sized businesses in the United States. By making Expanets a Lucent Business Partner, the deal also gave Lucent's Enterprise Networks Group the most extensive indirect sales channel serving small and mid-sized businesses in the United States. The GEM acquisition translates into the addition of 1,000 more experienced sales "feet on the street" for Expanets. Concentrating on the products of a few manufacturers, Expanets is now the largest NEC and Lucent dealer in the United States, as well as the second largest Siemens dealer, with strong ties to CISCO Systems, IBM and HP. With its sizeable sales force and distribution channel, Expanets can negotiate discount pricing and acquire the training and information needed to keep its workforce current on new technologies and market trends.

With the purchase of GEM, Expanets has completed its major acquisition program. Younger stated that the only additional companies it plans to acquire are those with specific services skills sets such as e-business consulting, application design, particularly in relation to relationship management, network design, and engineering and other network professional services.

EDUCATION/TRAINING
With 4,000 employees obligated to be fluent in many emerging technologies, Expanets utilizes a variety of internal communications media, including monthly audio and video conference calls with the entire employee base and senior management team, plus Web casts and weekly "Monday Memos" from CEO Walker describing industry developments, new offers, and customer success stories. There are national and local training initiatives, utilizing a variety of different methods: on-line training, the L-Channel (Lucent's satellite-based training), manufacturer-led training, and the Convergence Solutions Credentialing Program sponsored by the MMTA.

LABOR MARKET
Attracting and retaining employees able to sell, design, install, and maintain integrated solutions is, not surprisingly, Expanets' number one challenge. Younger described the Expanets compensation plan and benefits package as being in the top 10 percent of the industry. A private company at present but with a future public offering as a possibility, the stock options it offers to every employee is a particularly attractive benefit. "The entire Expanets strategy revolves around making sure the company can deliver better and more complete solutions to the customer, which aligns very well with most employees' concerns about their own career development. As the leader with a national presence, Expanets believes it can offer a better career path than most competitors," said Younger.

THE STRATEGIC ALLIANCE OPTION
Making their company attractive for purchase by companies like Expanets is one option, but not the only option, for voice and data distributors. The second article in this series will appear in the December issue of this magazine. It will explore the formation of strategic alliances for the distributors that prefer to maintain their independent ownership. MMTA provides resources and networking opportunities for channel partners to pursue either approach. However, the option of "business-as-usual" is off the table. Channel players must develop the ability to offer customers the professional services behind integrated solutions or be left behind.

Mary Bradshaw is president of the MultiMedia Telecommunications Association (MMTA), a subsidiary of the Telecommunications Industry Association (TIA). 

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