Bell On The Ball

Dec. 21, 2004
Lucent Technologies has channeled the invention power of Bell Labs into an innovation machine of breakthrough commercial products.

The challenge in the marketplace was to have different kinds of telecommunications networks -- telephone, Internet protocol, and other data networks -- operate together. Although many considered the task impossible, Lucent Technologies Inc. accepted the challenge, creating a product called Softswitch, a software-based open telecommunications platform. The system allows integration of all of these protocols and lets next-generation networks compete on an equal footing with those of established industry giants such as AT&T, MCI, and Sprint. Undertaken as a breakthrough project, the effort was completed after six months of work with lead customer Level Three Communications. The day Softswitch was announced last year, Lucent shares rose three points and the company gained $8 billion of market capitalization. "At Lucent we are encouraged by senior management to think in terms of market value, not just revenue or even profit," says project leader Ramesh Lakshmi-Ratan, director of business development, converged network solutions. The Softswitch success story contains at least three valuable lessons: speed, coupling with customers, and a focus on shareholder value. All three are manifestations of the new culture of innovation that senior management has created at venerable Bell Labs. The 25,000-employee R&D institution -- birthplace of such inventions as the transistor, the laser, and the communications satellite -- was part of the 1996 breakup of AT&T Corp. that created Lucent. However, competing in the ever-changing landscape of the communications industry, Lucent is buffeted by more agile competition in a market where profits are being squeezed by dramatic cost reductions and a crumbling of traditional industry structures. "In the face of all of this, the company that is able to invent new technology and get it to the market the quickest is going to be the winner," says Arun Netravali, executive vice president, research. To power Lucent in this environment, Bell Labs needed to be more nimble, business focused, and efficient in converting technology into value. To meet this challenge, Bell Labs has boosted its intellectual-property creation, more than tripling its annual patent registrations since the AT&T breakup. It has slashed the time from idea to product commercialization by up to 40% across the corporation. And Lucent has invested more than $32 billion on 29 acquisitions where buy was a better option than build. Along the way, Murray Hill, N.J.-based Lucent has become a $30 billion communications-equipment giant, and its stock has soared 900% since the 1996 IPO. A senior management that's supportive of innovation efforts has played a key role in Lucent's success. First off, Bell Labs' R&D budget of 8% to 9% of sales in AT&T days has been increased to 12%, of which almost one-tenth is devoted to fundamental research. Lucent CEO Richard A. McGinn routinely prowls the corridors of the research facility, inspiring the troops to better understand competition and the customers. He also brings a sense of urgency with quips such as, "Be first to market or don't bother." Each month senior management meets for half a day with researchers on their turf, not for business review but to feel the pulse of both new technology opportunities and to assess threats to the businesses. The meeting provides an opportunity for senior-management project champions to emerge. "It creates a flattening of the organization so good ideas can be moved along very quickly," says Bob Martin, Bell Labs' technology officer. Nowhere are speed, urgency, and teaming more apparent at Lucent than in its breakthrough projects. Currently numbering about 50, the projects are designed to launch disruptive, game-changing products into the marketplace as quickly as possible. Often reacting to challenges from the marketplace, as in the case of Softswitch, cross-functional teams are formed rapidly and coupled with lead customers. Fundamental-research scientists participate on the breakthrough teams, exposing strategic customers to the key talents at the heart of the corporation, exchanges that heretofore would have passed through countless management filters. "Before, not as many new products were getting into the marketplace," says Martin. "Now we are moving more technical expertise out closer to the customer. We have done a better job of bridging the multiple parts of the company in the innovation value chain." These quick-hitting teams mimic the actions of a small entrepreneurial company, giving Lucent the advantage of a nimble market approach backed by the tremendous innovation power of the Labs, home of 11 Nobel laureates and more than 25,000 patents. "We like to think about it in this way," says Netravali. "If we were a small company, what would we do to effectively compete with Lucent?" Leaders of breakthrough projects report to high levels of management both at the business and at Bell Labs levels. In fact, the projects are reviewed by CEO McGinn himself. A key role of top management is to remove impediments imposed by existing company processes to move the breakthrough projects along at hyperspeed. "Bureaucracies and processes are extremely important in managing a very large, complex company of 150,000 people," says Lakshmi-Ratan. "But that machinery is running along a certain path. Because these breakthroughs are going to fundamentally change the rules of the game, a lot of things that have to be done are counter to the current methods of operation. The projects need to move very fast and change direction very fast, and in a large company the only way to do that is have someone who gives you special pathways." For instance, told of a piece of equipment that would make life easier for a breakthrough-project participant, an executive unleashed a credit card and bought it on the spot. To give the overall R&D effort a basic platform and provide guides for resource allocation and capability development, Lucent relies heavily on its predictive skills. In their classic on breakthrough strategies, Competing for the Future (1994, Harvard Business School Press), Gary Hamel and C.K. Prahalad write, "To create the future, a company must develop a powerful visual and verbal representation of what the future could be." Application of the concept is a hallmark of the reinvigorated Bell Labs in the area of product development, patent strategy, and individual product road mapping. For instance, central to Lucent's technology development is the Lucent Network Vision, a look at where next-generation networks are headed. Created two years ago by the CTO Council -- chief technical officers from all the businesses -- the vision is used as a tool to provide a unified look into the future for the specification and implementation of network products across the company. With the vision in hand, the businesses are able to review all projects for overlap and synergy, and identify gaps in technology. "This forward look helps us identify what we think will be important for the network and to work where the puck is going to go," says Martin. The CTO Council also looks at the health of the intellectual-property portfolio of individual businesses and allows its forward look to guide what technologies need to be covered. In Lucent's optical business, for instance, a specific patent committee describes to the technical community supporting that business which areas of technology coverage are important for business growth. In addition, incentives have been established not just for filing patents, but for invention and patent filing specific to the context of the business. With this effort, patent registration at Bell Labs has increased from about one per day in the AT&T days to three and a half per day in 1999. Registration is forecast by technology officer Martin to reach six to seven per day by 2001. Formal new-product-development planning is guided by technology road maps, multiyear compasses of the lines of product and technology advances required to accomplish specific business objectives. Led by product management with cross-functional input from R&D, manufacturing, and marketing, "the road maps start with an external view of the market and how the business will differentiate itself in that market," says Martin. Combined with target costing, the road maps begin to build a bill of materials for future products. In addition, the road maps help define core competencies that need to be developed or acquired, and serve as a rallying point of communication across functions. "Road maps are a wonderful facilitation mechanism that focuses on competitors and the marketplace," says Martin. "It's a soft issue, but a very important one. Looking at road maps in multiple businesses has also pointed out synergies across businesses that otherwise we would have missed in this 25,000-person R&D effort." To measure the progress of individual product development projects, three yardsticks are applied:

  • Interval, the time to convert an idea into a commercial product delivered to a customer.
  • Competitive costs, including engineering and manufacturing costs, as well as target costs for future components. Cost of competitors' products are uncovered by reverse engineering and a look at competitors' income statements for cost of goods sold.
  • Predictability, expressed as a percentage, indicating how well the product meets the commitments made against it, such as feature content, overall performance characteristics, availability/manufacturing throughput, and system reliability/field performance.
As much as 30% of incentive compensation for product developers is based on performance against these metrics. At the corporate level, metrics applied to the innovation effort include percentage of revenues contributed by products new to the marketplace in the previous year and new revenue created per R&D dollar spent.

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