On Level 3’s Latest Restructuring Effort

May 7th, 2009 by · 8 Comments

On last week’s conference call, Level 3 Communications (NYSE:LVLT, news, filings) described a restructuring effort whose effects have been reverberating throughout the company.  As part of it they trimmed 150 people, focused on the director level and above, in their words ‘flattening the organization’ – never pleasant for those affected of course.  Obviously, with the arrival of Jeff Storey as COO and President, there were going to be changes as he puts his stamp on the organization.  While it’s still early, overall I’m actually impressed by the steps he is taking.  Dan Rayburn has a nice post today on the changes to the CDN group and the potential effects for customers of those services.  Level 3 is bringing the independently run group closer to the rest of the organization as it transitions from startup to growth mode.  But the changes to the Business Markets group go in the exact opposite direction, which is perhaps more important to the company as a whole.

For a long time now, the major complaints against Level 3 that I have heard from ex-employees and others in the sector boil down to 1) too much centralization in decision making, 2) too many VPs, and 3) a tendency to reshuffle them and call it progress.  While such criticisms aren’t that uncommon from those who have left (voluntarily or not) any organization, these themes have been very stable over time.  I find it very interesting how directly the new COO has addressed those concerns.  Obviously, cutting executive manpower is part of that, but I’m even more interested in the decentralization.  They are pulling all the national accounts together into one organization, which is actually not the news.  The news is that the rest of the accounts will no longer be run by a team focused on national accounts that could care less about smaller deals.

Level 3 has a huge metro footprint, but while they leverage it well for national accounts, the competition has of late done a far better job of applying local knowledge to gain local sales.  That’s how metro fiber specialists like TW Telecom (NASDAQ:TWTC, news, filings), abvt,  RCN Metro and the many smaller players have been generating solid growth on growing margins despite the economic turmoil.  It’s how Telcove did the same before Level 3 acquired them.  The reason is that those companies ensure that decision making is sufficiently distributed, that those who know the markets well have the power to serve those them properly with fewer edicts from above.  Level 3’s approach since assembling its impressive list of metro assets has been much more top-down, and while it has done well for larger national accounts it has frankly just not panned out at the local level.  They have been completely missing out on the growth that other metro fiber providers have seen over the last few years.  They have been losing deals they could have won and churning customers they should have kept.  This reorganization appears to deliberately shift some of that decision making power back out of Broomfield and into those regional and local markets.

Sounds obvious, but if they really mean it then it will be a seismic shift in the way Level 3 operates.  Only one geographical area has ever been operated with much local independence by the company:  Europe.  It’s not an accident that this is also the most vibrant piece of the company nowadays.

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8 Comments So Far

  • jeremy says:

    what is this – rev4 in business plans for enterprise?

    rev1 – buy everyone and let them sell, sell, sell
    rev2 – fire everyone and let wholesalers run it
    rev3 – hire back the enterprise folks we fired
    rev4 – fire the morons who were in charge of revs 1-3

    at level 3, that’s progress!

  • p. Merch says:

    A “spot on” dissection, Rob…let’s see how Storey’s magic at LEU carries over to LVLT.Initial steps most promising. Crowe understands.

  • Double U says:

    Jeremy is so correct. Have any of the recent restructures addresses the management responsible for ignoring the cries for a decentralized-local approach? Does Metro Product Management (CP) lose their jobs and does Level 3 hire back the people who suggested this for 2.5 years? When does Storey address the fact that Crouch continues to surround himself with drones and has only jettisoned the trouble-making folks calling for decentralized management so he can call the idea his own?

    Storey is obviously a good guy but until he determines the cancerous management and excises it, Level 3 will not improve the way it should.

    • Rob Powell says:

      Now now, if we went in and removed all the people that each person sees as a drone, there’d be nobody left at all!

      I do realize that one step does not mean everything is hunky-dory. Time will tell if further measures are taken and the leadership structure becomes what it needs to become.

  • Dave Rusin says:

    My read on the quarterly call — Level 3 is going metro and going deep in it — that’s where the big bandwidth, margins and pipes are. Jeff Storey is there to focus – he knows being close (local) to the customer is the formula for success. Their primary success and growth is not coming from CDN or Europe …

    Yesterday, Paetec virtually stated similar desires/results primarily around the advantages they are receiving from buying the McLeod fiber footprint. PAET “would hire 100 sales reps” to sell in the upper market! Watch PAETs EBITDA margins rise over the next 18-24 months as they get larger ARPUs over fiber infrastructure.

    Time Warner Telecom — they have known the value of local infrastructure for years and it shows.

    The low end segment in business is less and less attractive as broadband demand growth requires something larger than a piece of copper. Someone will always niche the low end but simple arbitrgae is getting tighter and harder to make a living.

  • Homer says:

    Speaking of restructuring efforts… anyone here has any insights into Daniel Wagner’s efforts at XO?

    He came in from GBLC in January to head the business group… restructuring at full swing at XO too.

    Is he also going “local”?

  • CroweLovesTOFU says:

    This is a great BLOG! It is rare to see honest discussion of Level 3 especially. In my honest opinion, until they remove the BT folks from their positions of power, the culture will never change at Level 3. Without a culture change, the promise of their asset base will never be realized. I think Crowe just thinks that people with British accents sound smarter than folks from Austin or Coudersport.

    Does anyone think that Crowe is asking his buddy Obama for a bailout yet??

  • The_highwayman says:

    Based on the shopping spree and disaster that followed, it would seem to me that LVLT managment forgot how to run a metro division…

    It seems to me that if LVLT had built a back bone w/say 6 conduits and then spent the rest of the money deploying like the did at MFS then we would might have seen results match all the hype.

    It really bothers me when I hear them talk about they have a long history of serving enterprise customers…the closest to metro customers they ever did was deploy EPOP to TPC’s in early 02 and 03.

    This kind of arrogant talk reminds me of when they deployed VoIP in early 2004, they stated a long tradition of voice, when in truth they decided to get out of VoIP a year early, and when VoIP was sexy they hired back 90% of the voice folks they laid off to get it up and running.

    If LVLT had put more thought into their original business plan and did the backbone and limited MFS style business case, the results would be much different today.

    That all said those that know, know 100% that in the early days LVLT was being built as a shake and bake. Had the .COM bubble and telecom meltdown not occurred or been delyaed even by a QTR LVLT would ahve been sold to the highest bidder.

    There was no intention to operate it long term, i used to really get annoyed over watching Sr. managers and directors not listening to those in the trenches, etc because they spent all day checking sharenet and calaculating how many “millions” they would get when it was sold.

    Storey is the man for the job and imho and only speculatively speaking I wonder if we see Mr. Scott retire, Crowe given the Chairman’s chair and Storey become CEO.

    LVLT has embraced the rush to metro a little to late imho. in the metro fiber building business you need cash, it takes (depending on electronics deployed and difficulty of OSP construction and ROE agreements around $30K per build) it gets cheaper depending on metro ring management(node inserts, capacity planning, etc) but new builds require upfront capex/opex.

    ROE is also becoming a minor challenge and getting a solid agreement in place takes time.

    Property management companies in certain markets are seeing lease rates go down and as a result are now charging for floor space and power.

    Some property management companies abhore having “another” fiber company even come in at all, these issues are hammered out eventually.

    average new fiber builds can take up to 90 days to complete, when you consider, gear, OSP, and ROE issues.

    The way to success for this is a decentralized local City/operations approach, and that is going to be Storey’s largest hurdle to get over.

    As most have stated and I know first hand, until LVLT can change it’s mindset and culture they will continue running in place and trying everything to grow.

    Personal statement and wish list for me:
    Storey becomes CEO
    Brings back Bob Guth to run BMG
    Brings back Royce Holland as CIO
    Complete a tactical and strategic top to bottom review of products and direction.
    Sell core and non-core assets that do not fit the strategic review, even if it is something like CDN and Vyxx.

    It is not to late to turn this around by any means, but it will take a complete makeover of current managment and transformation of the company to really ignite the potential some of us helped build.

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