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It's been a little more than a year since Mike Zafirovski left Motorola to take the reins at Nortel. In that time he has remade top management, raised the profile of Nortel's enterprise business, focused product development, slashed costs, instituted quality and ethics principles, and established sales and profitability targets. Zafirovski shared his thoughts with Network World managing editor Jim Duffy on how things have gone and what's next.

Cisco says it is more focused on emerging technologies and market transitions than its rivals are. Why should Cisco worry about Nortel?

Cisco is a great company; I have lots of respect for them. Most people would say they are a very powerful sales and marketing machine, not necessarily an innovator. But Nortel is a very passionate company that really wants to make a difference, to be a great alternative. A company that has led in most communications, including the evolutions on IP. We are very committed to lead again and we believe we are bringing our innovation back to a core competency with smarter commercialisation of that technology. And most important, a company that's going to make business simple and more flexible than any other company out there.

Your plans to reduce R&D spending to 15 percent from 17 percent of revenue means your total annual R&D spend will equal that of Cisco just in the service provider market. How do you compete when you're being outspent by that much?

We are very committed to being really relevant in all of the places where we participate. We are a strong no.2 in CDMA, for example. No.2 in enterprise VoIP, no.2 in Ethernet switching; no.1 in carrier VoIP and Metro Ethernet; no.1 in packet switching and no.2 in optical. One of the reasons we decided to exit UMTS is just for that reason: four or five point market share, maybe seven. We were so insignificant. The challenge for us is spending well. We are not underspending relative to revenues.

Some analysts view Nortel's absence in the current rounds of consolidation to be a detriment. Is consolidation necessary for Nortel's long-term survival?

We are in favour of consolidation. Fewer carrier customers presents some pricing advantages. Do we plan to grow inorganically? Yes, we bought Tasman Networks [for enterprise routing]. We bought [government integrator] PEC. We have the joint venture with LG Electronics.

The Lucent and Alcatel combination is complementary to both companies. Lucent is big in CDMA , Alcatel is not, for example. Would bulking up or complementing some of our portfolio at some time in the future be beneficial? The short answer is: of course. We'll keep our eyes on it very much.

Do you have any specific goals or priorities for each line of business - Mobile, Metro Ethernet, Enterprise and Global Services - going into 2007?

We just spent two pretty long days on budgets. It's pretty exciting to think what we will be able to do with the enterprise side. And to take full advantage of the collaboration with Microsoft on unified communications. Also, we will be working very closely with companies like IBM to start introducing the concept of 'Nortel Inside'. [Nortel declined to elaborate on this campaign, which it plans to detail later this year. Nortel and IBM already collaborate on development of IMS applications using servers from both companies, plus IBM software.] Also we are quite bullish on what's going to happen with WiMAX.

Nortel's been quoted as sizing the WiMAX market at US$7.5 billion by 2010. Is the company sticking with that forecast and are you seeing a return on your increased investment in WiMAX?

We are already taking revenue. We are very excited about our announcement on a transaction with Chunghwa Telecom from Taiwan. Not a trial, but an actual order, which we'll be delivering in the first part of next year. As Sprint, Chunghwa Telecom or the established players demonstrate the power of WiMAX, I believe the upside is greater than the downside, with respect to the size of that market.

What can enterprises expect next year from your alliance with Microsoft?

Much stronger alignment, even on the existing products - Microsoft's LCS and our product. What they are going to be able to see is a very robust transition plan from whatever customers currently have to eventually unified communications solution. They'll see part of that in the latter part of 2007 and of course, that's going to become more prevalent in 2008 and beyond. Most significantly, this is opening doors for both of us.

Any plans to expand into the consumer market?

Not yet. We need to walk before we can run and we have quite a big opportunity in the enterprise - large, medium and SMBs.

How would you sum up Nortel's progress since you joined?

We're absolutely thrilled with the reception from customers and employees as well as with our prioritisation on bolstering the processes, putting in Six Sigma to address our quality standards and reinstituting time-to-market - a sophisticated product introduction process that the old Nortel used to have to really pump products. I give ourselves an A-plus on that.

I wish we had made more progress on our gross margins. [Nortel was shooting for 40 percent-plus but came in at 38 percent in the third quarter, down from 39 percent the year before.] We've been able to become more competitive but industry pricing has also been quite challenging, particularly on the carrier side. The good news is we have stabilised our gross margin declines.