Trust Key to Turnaround at Troubled Telecom
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Trust Key to Turnaround at Troubled Telecom

On June 16, Richard Notebaert was named chief executive of telecommunications giant Qwest. One of the first people to call and congratulate him was Joan Walker, who had worked with Notebaert during his tenure as chief executive at Ameritech.

Paul Holmes

On June 16, Richard Notebaert was named chief executive of troubled telecommunications giant Qwest. One of the first people to call and congratulate him was Joan Walker, who had worked with Notebaert during his tenure as chief executive at Ameritech. It didn’t take long for Notebaert to turn a social call into something more, and within hours Walker—most recently senior vice president of global public affairs at Pharmacia—was considering a job offer.

Like a growing number of CEOs, Notebaert understood that communications would play a vital role in any turnaround, and he understood the advantage of having a seasoned, trusted communications professional at his side. Following in the footsteps of Lou Gerstner, whose first appointment at IBM was former RJR communications chief David Kalis, Notebaert wanted Walker to join him in Denver, to help restore credibility to a corporate reputation that was in tatters.

Qwest was burdened with debt: annual revenues were $20 billion and the company had more than $26 billion in short and long-term borrowings. The Securities & Exchange Commission was looking into whether Qwest artificially inflated revenues by swapping network capacity with rivals, while the Federal Communications Commission was reviewing a request to offer long-distance services in states served by the company.

There were also cultural issues. Former chief executive Joseph Nacchio—who sold $248 million worth of stock before he was pushed out—was known as “Macho” Nacchio for his aggressive, hard driving style. Notebaert, on the other hand, has a reputation for building consensus within an organization.

Walker was not the only former Ameritech executive to join Notebaert in his new challenge. The new CEO has reunited many of the executives who made up the senior management team at Ameritech, including Walker; chief financial officer Oren Shaffer; Gary Lytle, vice president of policy and law; and Barry Allen, chief human resources officer.

“Both Shaffer and Notebaert were considered pretty stable (Baby Bell) executives, which is probably what Qwest needs right now,” said Patricia Lee, an analyst with independent credit-rating agency CreditSights. “They don’t need one of these superstars that are going to blow themselves up.”

In fact, Notebaert and Shaffer are typical of the kind of senior executive companies are turning to in troubled times: straight shooters who have never bought into the cult of personality that sprang up around some business leaders in the late 90s. But they have an advantage some of their counterparts at other potential turnarounds do not.

“The incredible working relationship that we had with each other at Ameritech gives us an incredible advantage in a situation where the biggest challenge we are facing is time,” says Walker. It’s important that a management team charged with rebuilding trust has total trust in each other. “We can anticipate each others’ thought processes. We know what other people are going to ask for before they ask for it. There’s a rhythm to the way we work together.”

While the new team had several issues to address, Notebaert understood the importance of rebuilding trust.

“The challenge here is to be disciplined, focused on fundamentals, restore some credibility,” he told reporters on his first day. “Any time you get a fresh pair of eyes looking at something, you can make it better. Change is a good thing.”

When asked what he considered job one, Notebaert didn’t hesitate, telling CNNfn, “The credibility issue that we have to create with our employees and with the people on Wall Street. I think, really, reinforcing the quality of service we have with the regulators. I think there are a couple of things that you do for credibility. Transparency is very important. We need to talk to people, tell them what‘s going on, and share the details. And at the same time, that we’re being very open, give them a sense of the direction that we are going and how we‘re going to take care of that balance sheet issue.”

That has to be music to a chief communications officer’s ears. 

“I think Dick knew what needed to be done to restore value and to address the concerns of our shareholders and our customers and our employees,” says Walker. “But that’s not to underestimate the complexity of the challenge or the correct sequencing of the steps. The biggest question was whether we would be given enough time.”

In particular, there were concerns that the company’s debt would make it impossible to carry on. Shortly after taking the helm, Notebaert and Shaffer discovered accounting irregularities and on July 28 the company said it could have to restate earnings for 1999 through 2002. An investigation by new auditor Ernst & Young uncovered misstatements that led the company to book about $874 million in revenue for 2000 and 2001 in lump sums up front instead of over time. It also understated expenses in 2001 by $113 million, but overstated them by $15 million in 2000.

Notebaert made it clear the company would come clean about any accounting problems. “If accounting errors were made, they will be corrected and they will be disclosed. The public will be fully informed,” he promised in a conference call with investors. “If an individual violated company policy, appropriate action will be taken. Internal practices are being and will continue to be enhanced.”

The new CEO won high marks from analysts for his candor. “There’s no doubt that the trust factor of all American corporations is at a low and Qwest disproportionately so,” said Richard Klugman of Jefferies. “Taking an immediate priority on resolving the accounting question marks is wise because no one’s going to believe any of the numbers this company puts out until they give it the seal of approval.”

But the restatement created other problems. One condition of the company’s funding obliges it to stick with a ratio of no more than four times debt to EBITDA (earnings before interest, taxes, depreciation and amortization). Qwest has total debt of about $25 billion, and in April, it forecast full year EBITDA of $6.4 to $6.6 billion. The restatement could reduce EBITDA, in which case the company could have violated its covenant in the first quarter of 2003.

To avoid that possibility, Notebaert moved quickly to sell off what he considered “non-strategic” assets, and on August 20, Qwest announced an agreement to sell its QwestDex publishing business to a new entity formed by the private equity firm The Carlyle Groupfor $7.05 billion.

“As we promised, we are moving aggressively to take the necessary steps to ensure the long-term success of the company,” said Notebaert. “The sale of QwestDex is a significant part of our plan to strengthen our balance sheet and will allow us to focus on maximizing the profitability of our core operations.”
With the sale of the directory publishing business, Walker says, “We have the flexibility we need. We have the financial flexibility to get through 2005.”

In some ways, Walker says, the challenge was similar to the one she faced when she took over as senior vice president of communications at Monsanto Corporation in 1999. “That was a company in a different kind of distress,” she says. “But we had enormous regulatory challenges in Europe and we were dealing with NGOs on a variety of fronts.”

There were differences. Monsanto’s issues were global, including protests in Europe and Japan, while 90 percent of Qwest’s business is in its 14-state service region. On the other hand, Monsanto had more time to turn things around, although Walker says there was the same sense that if credibility issues were not addressed the company’s very existence was threatened.

“Whichever stakeholder groups you are dealing with, the issues are the same: trust and credibility and transparency,” she says. “The needs are the same. And the processes you need to put in place to address those needs are very similar,”

At Monsanto, Walker moved quickly over her first two months, creating the Council on Biotechnology Information, putting together a coalition of companies and others with an interest in genetically modified foods, and pushing the company to communicate more openly with all its stakeholders.”

In both cases, Walker’s approach was to make open, two-way communications a way of life. 

“We have been as transparent with the media and with analysts as we could be under Regulation FD,” says Walker. “We told them everything. We have been practicing what I call radical transparency.”

Radical transparency, says Walker, is about “being transparent in everyone we do. In all our actions and behaviors and communications. It’s not only communicating what you are doing, but also why you are doing it. It’s providing context. When we talk about retooling the business model to meet current demands, we explain why and we explain how we are going to do that so the people who are responsible for executing the new strategy understand it as fully as possible.”

But Walker refuses to contrast the new communications approach to that of the old regime.

“One of the first pieces of advice we got from Dick was that we couldn’t turn this company around if we were looking back,” says Walker. “You can’t look through the rear-view mirror. You have to look forward.” For that reason, she says, the communications team spent very little time thinking about what the old management had done, or how stakeholder groups felt about the old company.

(Having said that, the reaction of employees to Notebaert’s appointment was telling. “We thought about doing a conga line down the 16th Street Mall,” Qwest software engineer Ken McVicker told The Denver Post. “There weren’t too many frowns in the office.” The Post reported that about 300 employees packed Qwest’s downtown auditorium to greet their new boss and exploded into cheers when Notebaert took the podium. Investors were equally impressed, pushing Qwest’s ailing stock up more than 20 percent.)

“We didn’t look back. We just started to do what we thought was the right thing to do,” says Walker. “It’s pretty simple. Management has to be transparent. It has to be accessible. It has to communicate frequently with all stakeholders. And it has to understand that relationship building is a long-term process.”

To help Notebaert and the management team communicate with key stakeholders, Walker has a staff of about 60 people in marketing, which includes research and sales channel communications, branding and sponsorship, and another 23 in public relations, which includes internal and external communications, analyst relations, executive positioning, state and federal relations. Almost all of them were inherited from the previous communications team.

They work with several PR firms, but there is no agency of record and Walker has an unusual philosophy about the use of agencies despite (or perhaps because of) once being the president of Bozell Public Relations, a top 20 firm at the time.

“Outside agencies should never replace people inside the company who have skin in the game,” she says. “What happens all too often is that agencies take the cream of the assignments, they get to do all the strategizing, and people inside the company are just arms and legs. I want to give my people the opportunity to stretch, to become better at what they do.”

It would have been easy for Notebaert and the management team to put all their emphasis on the company’s stock price, emphasizing the needs of shareholders over all others, particularly at a time when many commentators are focused on corporate governance issues to the exclusion of all others. But Walker says there was an understanding from day one that all the company’s relationships were important.

“We will be increasing Qwest’s credibility with Wall Street and going out to meet with customers to make those relationships even stronger,” Notebaert said during an analyst teleconference the day he took the helm. “I expect to spend quite a bit of my first few days at Qwest talking with employees. And, of course, the regulatory community is always a high priority.”

Taking the long-term view means managing all the important relationships, Walker believes. “This is not about getting in and making a couple of transactions and then getting out of town,” she says. “This is about building this company and creating real value. To do that, you have to focus on all your key relationships.”

That’s one of the reasons bankruptcy was never an option, she says. ““We never talked about the b-word. Bankruptcy was not an option that was ever discussed inside the company. But obviously other companies have taken the bankruptcy route because it offered them an opportunity to restructure without financial pressures. But this company has 55,000 employees and 40,000 retirees. That’s almost 100,000 people and their families, and if you take their 401ks down to zero you take away their life savings.”

“Walk around the city of Denver like I do,” adds Notebaert, who was living in a downtown hotel until his house is ready to move into. “We own a lot of real estate. We have a lot of employees here. We are really important to the economies of the states that we serve. If you ever do something like bankruptcy, everyone’s 401k, it doesn’t go from 100 to nine, it goes to zero.”

Moreover, there is an understanding that any long-term turnaround has to start with employees.

“Dick believes that if we do the right thing for our employees, and if they truly understand what our strategy is, they are the ones who will be responsible for delivering on that strategy,” says Walker. “They are the ones out there dealing with customers every day, helping to increase customer satisfaction, and listening to what customers have to say about our services. If you don’t communicate with employees, your strategy is going to fail.”

She cites Honeywell chief executive Lawrence Bossidy, who once addressed the Ameritech management team and who has since written a book, Execution: The Discipline of Getting Things Done. “He once told us a company going through a turnaround needs to focus on communication—and two-way communication—with employees. He said the CEO of a company in that situation must spend about 40 percent of his time communicating with employees.”

Dick Notebaert has clearly taken that advice to heart. On his first day as CEO, employees were called together in the auditorium at the company’s headquarters. “The only sustainable competitive advantage is people,” he told his audience. Since then, he has been aggressive in getting his message out to all employees.

Says Walker, “We have held all-employee meetings and we are using broadcast channels when we need to ensure that messages get through. If we have employees in really remote locations, we are sending videos out to them. He also sends out e-mails on a regular basis. They have become known within the company as “good mornings,” because he always starts out with that greeting. Walker says he composes the e-mails himself, encourages responses and reads them all—1900 responses at last count—personally.

“A lot of the responses he gets are very emotional,” she says. “Employees have shared with him their personal stories, their feelings about the company, their hopes and fears. Some of them have brought a tear to my eye. I had to tell him, don’t send me more than one a day. But I think it’s a testimony to the kind of trust he has built already that employees share those stories, share their emotions with him.”

One policy change had enormous symbolic value. In late June, Notebaert said he would reinstate an old USWest practice of granting service-anniversary gifts to employees with more than 15 years at the company—a practice that Qwest management ended because they felt it honored longevity at the expense of entrepreneurial spirit.

Walker is only a month into her job, but she believes the company has already made enormous progress in turning perceptions around and earning credibility.

“Everything we said we would do we have done so far,” says Walker. “By the end of last week, you could sense that reporters who had been skeptical were beginning to say to themselves, perhaps these guys are actually going to make it after all.”

Now, heeding Notebaert’s advice, she is looking to the future.

“Like Monsanto, I think Qwest has the right business strategy, but the timing was wrong,” says Walker. “Right now, there’s a tremendous over-capacity in broadband. Right now, 95 percent of the cable that has been laid is dark. But 10 years from now we will be using that cable to deliver services that make your life radically different and better.”

On August 21, the Department of Justice recommended that the Federal Communications Commission approve Qwest’s application to re-enter the long-distance business in four states: Washington, Utah, Montana and Wyoming. A month earlier, the DoJ had recommended approval of an application for the states of Colorado, Idaho, Iowa, Nebraska and North Dakota.

Less than a month after Walker took the helm of the communications organization, Qwest brought on board another important member of the former Ameritech team, advertising agency Foote Cone & Belding. FCB was charged with creating a new advertising campaign to introduce Qwest’s re-entry into long-distance.

“Foote, Cone & Belding has vast experience with some of the largest product and service brands, including 30 years in the telecom industry, which makes it the right partner with the right heritage to complement Qwest’s focus on customer service,” says Walker. “Together we will develop dynamic marketing and advertising programs that will bring the ‘Spirit of Service’ to life for customers.”

The company has already started to roll out its new marketing effort internally. The effort will focus on “The Spirit of Service,” which—not coincidentally—is the name of a famous painting hanging in the Denver headquarters of the Telephone Pioneers of America. The painting depicts a lineman for the old Mountain Bell, one of Qwest’s predecessor companies, going about his work in the most frightful weather conditions. It captures the commitment to service that Walker believes will distinguish the new Qwest.

The campaign is being introduced to the company’s employees before its external launch because, Walker says, “Communications will bring the brand experience to life 30 percent of the way, but operations will drive the remaining 70 percent. Our employees will deliver on the promise, and we need to explain to them what kind of performance we expect, and what kind of changes we will be putting in place to measure and reward success. That’s what will drive the strategy.”

Once again, employees are the most important audience—because without their commitment, the turnaround will be stillborn.

“We have tremendous faith in our employees,” says Walker. “These are people who have put themselves in harm’s way to make sure you and I have a dial tone. That’s something we all take for granted, but during the recent fires our people were out there making sure junction boxes were covered with asbestos so they would be protected, making sure the fire service had telephone service, making sure residents who were in the path of fire could call out.”

That kind of service, Walker says, will give Qwest an opportunity to sell an expanded bundle of services to its local customers.

“We have a pretty simple theory that if our customers are satisfied with the service we provide they will be loyal, and when we come to offer them long distance service along with their local service they will understand the benefits of working with a single carrier, and they will trust us to be that carrier,” says Walker. “But it all begins with service.”
Long-distance in Qwest’s 14-state region is a $10 billion business, Walker says, and right now Qwest has precisely none of it. The opportunity is obvious. If Notebaert can take put Qwest in a position to take advantage of it, he will have accomplished one of the more dramatic turnarounds in recent corporate history.

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