AFC: Different Kinds of Businesses

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One of the challenges with an acquisition is that the businesses in their inherent financial condition are different. In this case, I will use the ONT business that we had with FiOS as that business. The ONT business was a 20% gross margin business at best. The rest of AFCs business was 45% GM. When Tellabs acquired AFC, this was worse as Tellabs worked from 60% GM or so.

Now, people will immediately describe how bad the ONT business was. It was not, on its own, a great business. However, the ONT business supported the OLT business at FiOS which was a 70% GM business. On top of that, the costs to operate the ONT business were very low. The normal AFC business was a low to moderate volume high mix business. The ONT business was a high volume, low mix business. Other than the versions that Verizon had us make but never deploy, we only built 1 version at a time.

I could also argue that there was no need for Sales and Marketing with ONTs. There was no compatibility with 3rd party products, so when Verizon bought our OLT they had to buy our ONT. Nobody called on Verizon to sell ONTs. No advertising campaigns were made for them. The operations teams involved were very small. Even the Engineering Teams were small. As long as we could end up with less than 20% OPEX on the ONTs, we made money.

There were two other benefits from this kind of business. First, suppliers fought for the business and gave AFC and then Tellabs all kinds of discounts to get ONT business. This meant that other products received cost benefits from the ONT business. The other gain is best demonstrated by the way Tellabs did cost accounting. Tellabs allocated "Corporate Costs" in a flat percentage to all products. ONTs used almost none of these services, so the rest of the product line let ONTs carry costs that were not related to them.

Which leads us to talk about how to manage this kind of product line within an organization that has a very different financial profile. The best way is to segment the business into a separate reporting structure, even if that structure is internal only. That way resources can be appropriately assigned and managed. The same will be true the other way around. A smaller revenue, high margin software business will not be managed easily within a larger revenue, lower margin hardware business. The cost structures are simply to different to allocate costs fairly.

Have a great day!

Jim Sackman
FocalPoint Business Coaching
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