he bursting of the 1990s’ stock market bubble was an ordeal for all technology company CEOs. But few experienced it in quite as brutal a fashion as Patricia Russo. The veteran of telecommunications equipment maker Lucent Technologies and its former parent, AT&T Corp., became Lucent’s chief executive in January 2002 -- just as the company was beginning to suffer what would be a withering postbubble decline.
Lucent was one of many makers of telecom gear whose stocks had been propelled to dizzying heights by an explosion in capital spending on wireless and Internet-based networks in the late 1990s. It got caught up in that millennial fervor, pouring money into telecom start-ups and extending financing to promising but profitless customers.
When those companies began to fail, Lucent almost did, too. Revenues plunged from $28.9 billion in 2000 to $8.5 billion in 2003. Profits? After earning $1.2 billion in ’00, the company piled up a cumulative net loss of nearly $29 billion over the next three years.
When AT&T spun off Lucent in a 1996 IPO, the stock had fetched $27; it split twice and soared to $82 by December 1999. By October 2002, however, Lucent had sunk to 58 cents.
But Russo seems to have a soft spot for troubled companies. She worked her way up at AT&T and Lucent during the ‘80s and ‘90s (another rising star at those companies at the time: Hewlett-Packard Co. CEO Carleton [Carly] Fiorina). And right before being named Lucent CEO, Russo spent nine months as president and COO of Eastman Kodak Co.
Back at Lucent, she drastically streamlined operations, slashing spending and laying off tens of thousands of employees. (The company’s workforce of 31,500 has shrunk from 126,000 in 2000.) Last year the proud institution notched its first profit since 2000: $2 billion on $9.1 billion in revenues. But Russo, the former co-captain of her Trenton, New Jersey, high school basketball team, faces many challenges downcourt, from declining wireless equipment sales to complex customer demands arising from next-generation wireless networks.
She recently sat down with Institutional Investor Senior Editor Justin Schack at Lucent’s Murray Hill, New Jersey, headquarters.
Institutional Investor: How does your experience as Lucent CEO compare with your expectations?
Russo: I came back before the industry really dramatically declined. And nobody predicted how deep the downturn would be or how long it would last. So it has turned out to be radically different from what I anticipated. So much spending got sucked out of the industry. Thousands of customers disappeared, and those that stayed around dramatically cut back spending. In 2002 revenue was dropping like a rock, and there was nothing we could do about it. So we got very focused on things we could control.
Such as?
We fundamentally changed how we managed our supply chain, how we shaped our portfolio, and simplified the underlying processes we used to manage the business. When the industry started to stabilize in 2004, everything we had done really came together, with some top-line help, and created significant leverage to the bottom line.
Making such big changes at your old company must have been difficult.
Nobody likes to make decisions that affect people in the business. But it’s my responsibility. I and the senior leadership team had to be proactive and aggressive about taking action so that this company would weather that storm. And we did. But it was not a fun time, for sure.
Have you been able to catch your breath now that things are stable?
I try to preserve some measure of balance. It is hard to just go 24-7 and not every now and then take a step back. You need time to think, evaluate and assess. I try to do that, but I would be less than honest if I didn’t say it’s been pretty intense -- and appropriately so.
But have you enjoyed it?
I have, as strange as that may sound. I like the opportunity to work with terrific people and sort through complex challenges. And frankly, it feels good when you can see that the decisions you’ve made in fact have made a difference. Our work is not complete by any measure, but we have made a lot of progress.
Does Lucent’s future lie in providing services to network operators rather than in making equipment?
We see a big opportunity in helping our customers integrate networks in a world where different types of communication are converging. Services are going to be an increasingly important part of our business over time, but not in lieu of our commitment to providing equipment for wired and wireless networks.
Are your relations with customers changing as they build next-generation networks?
We’ve always tried to be strategic partners with our customers. The need for that will intensify as the world becomes more complex. Customers will want to simplify their lives and reduce the number of suppliers they partner with. They will look to large players that have the breadth and depth of expertise we do.
You’ve cut R&D a lot. Do you worry about falling behind competitors?
I can understand how that perception might exist, because we’ve cut so much from every line item of our income statement. But we’ve been careful to channel our investment into the places where we think the puck is moving, like next-generation optical and mobile networks. And we have been cutting back in the places that are, frankly, part of the legacy portfolio. So you have to look underneath the covers and see where the dollars are really going. As a percentage of revenue, our spending is commensurate with the market opportunity.
You got rid of the COO position.
I’m pretty hands-on. When I first came in, there was so much going on. But once things started to stabilize, I wanted to be closer to the business.
Will Lucent continue to grow faster overseas than in North America?
Historically, we’ve derived 65 to 70 percent of our revenue from North America, but now the split between here and overseas is more like 60-40. There are a lot of growth opportunities in emerging markets, where communications networks are being built to support fundamental economic development. We’re participating in that in places like China, India and Russia, and we’ll continue to pursue opportunities outside the U.S.
Is Asia the most attractive region?
It’s very appealing, because that’s where so much of the world’s population is. But parts of the Caribbean, Latin America and Eastern Europe are also interesting.
Why did Lucent change the formula for determining your compensation?
We chose operating income rather than the stock price as the primary measure of performance for determining the senior management team’s compensation. When a company’s going through a turnaround, you have to measure people by something they can control. Every three years we reevaluate our compensation structure. This year we’re due for that, and we will look at what benchmarks are the right ones to make sure our interests are aligned with shareholders’.
Is coping with the Sarbanes-Oxley Act hard?
It has required an intense concentration of resources. We take it very seriously, and we believe fully in total transparency and openness. We believe that we owe our investors as robust a view of this company -- both the challenges and the opportunities -- as is possible.
How do you feel, though, about having to devote resources to compliance when you’re fighting to restore profits?
There are a number of positive aspects to Sarbanes-Oxley, and regulation was necessary given the great sensitivity to the corporate scandals that occurred. But nobody should kid themselves about the level of investment, time and attention corporations must devote to just affirming -- in many cases -- what they’re already doing. We have learned in the past few years that we have to keep a lot of balls in the air at the same time. We were in an industry that was tanking, we had issues with our credit ratings, and we had to do capital market offerings to assure liquidity. We settled shareholder litigation and dealt with some issues we found from back in 2000 and took to the Securities and Exchange Commission. And we were running the business. Maybe we’ve just gotten hardened to doing a number of things simultaneously.
Is the U.S. corporate playing field level for women?
The landscape certainly looks a lot different today from when I started out. We have made a lot of progress. But if you just look at the raw numbers, it’s hard to argue that there’s full representation of women in senior jobs. We’ve always been a pretty diverse company. So quite frankly, it’s not as much on my radar screen as it is in some other companies. I have women running my wireless and wireline businesses. I believe that the more views you have attacking a problem, the better the answer.
