Avaya is battling Cisco over the future of business communications. Its Nortel acquisition might give it an edge.

Elizabeth Woyke, 08.26.10, 01:00 PM EDT
Forbes Magazine dated September 13, 2010

Making meetings fun: Avaya Chief Executive Kevin Kennedy plugs into his virtual world for businesses.

Brett Shockley wants to show how smart a conference call can be. As he dials a colleague, software on his laptop tees up documents and e-mails he might want for the conversation. When he adds another co-worker to the call, the software reorders the files according to how relevant they are to everyone on the line.

"Usually you're frantically digging up things on your computer," explains Shockley, vice president of emerging products and technology at telecommunications company Avaya ( AV - news - people ) is battling.

The new software is part of Avaya's plan to leap past Cisco ( CSCO - news - people ) in phone software and phone equipment and fend off interlopers. Those are Google ( GOOG - news - people ), which has a call-forwarding service that could be a threat in a few years' time, and Microsoft ( MSFT - news - people ), which wants to jump from the computer to business phones.

Avaya is also working on call center technology that lets agents chat with customers on video. And it supports a virtual world for business users (a sort of Second Life that hosts meetings in digital conference rooms, complete with avatars).

The company's boldest move may be a tablet device that hosts phone calls and messaging services, enabling a busy executive to take a conversation from the office to the road. The Basking Ridge, N.J. company, which was spun out from Lucent Technologies in 2000, will only say it will soon introduce a gadget that supports "multiple modes of communication."

A tablet could strike at Cisco, which in June introduced a 7-inch, 1.15-pound tablet that will sell for under $1,000. The networking giant has poached Avaya customers by operating as a one-stop shop for communications technology.

Avaya's phones have been ubiquitous in offices for a decade, but for the past five years Cisco's have been gaining on it. In the first quarter Avaya accounted for 25% of the money spent on business phone equipment and Cisco for 22%, researcher Dell'Oro Group estimates.

Avaya, whose revenue has been stuck in a range from $4 billion to $5 billion a year, needed a growth plan. In 2007 Silver Lake Partners and TPG Capital invested $8.2 billion in the firm, took it private and began paring down business units from 27 to 3 and boosting research and development funding. To date it has spent $1.2 billion on R&D, and 90% of senior management has been replaced. Last year Kevin Kennedy, then head of fiber-optic equipment maker JDS Uniphase and a Cisco executive in the late 1990s, was brought on board as chief executive. His first big move was to acquire a large chunk of competitor Nortel for $900 million.

The acquisition gave Avaya a huge network of resellers and routers and data switches--two longtime Cisco strengths. Avaya says 95% of Nortel resellers will offer its products and 75% of its global business now flows through outside distributors (up from 58% pre-Nortel), similar to Cisco's sales model. Verizon ( VZ - news - people ), Deutsche Bank ( DB - news - people ) and JPMorgan Chase have signed new contracts with Avaya in recent months.

Avaya also got Nortel's best technologies. Nortel wasn't able to capitalize on them and filed for bankruptcy in 2009, but Avaya says it has sharper focus and longer-term goals, in part because it is smaller and privately held.

For the nine months ended June 30 Avaya reported a loss of $657 million (largely attributable to Nortel integration costs). Still, it seems to be on the right path. "Avaya's products were good, but their reach was limited," says Yankee Group analyst Zeus Kerravala. "Adding Nortel should create a much stronger competitor to Cisco."

Though its investors are eager to earn back the money they spent, Silver Lake managing director Charles Giancarlo, a former Cisco executive, says Avaya won't go public until it has digested most of the Nortel purchase and delivered three to four quarters of solid growth. By then, he predicts, Avaya will be associated with far more than desk phones. "We're taking a new approach to how people communicate," says Giancarlo. Let's hope he succeeds: Maybe someday we'll get software that eliminates such annoyances as phone tag, wrong numbers and long-winded call menus.

Avaya has taken office phones from analog to digital. The launch of a tablet device will make them mobile.