Once more into the breach By Carol Wilson Jan 23, 2006 12:00 AM

Industry veteran Royce Holland takes up his sword to save McLeod

In 2000, just before the telecom market plummeted from the dizzying heights of hyperbole, two pioneers in the competitive communications arena seriously discussed merging their efforts to create a single, nationwide competitive telephone company.

Clark McLeod and Royce Holland might well have succeeded in combining their two companies — McLeodUSA and Allegiance Telecom — into a single force and changing CLEC history in the process, but Holland's biggest investor — Morgan Stanley — vetoed the idea.

Six years later, Holland joins McLeodUSA as CEO under drastically different circumstances, but with the same respect he had earlier for the company founded by Clark McLeod and the network built by Roy Wilkens, original CEO of WilTel and later CEO of networks at McLeod.
“I've known Clark McLeod since 1990 and Roy Wilkens as well, and I always had the highest degree of respect for them,” Holland said in an interview at McLeodUSA's Cedar Rapids, Iowa, headquarters, four days after his appointment as CEO was announced. “The quality of their network operations and customer care has always been exceptional. Any network built by Roy Wilkens is going to be good.”

Respect for old friends and fellow competitive pioneers is not blinding the Texas native to the reality of McLeod's current situation, however. As it emerges from bankruptcy for the second time in four years, McLeod must undergo a significant shift in strategy to succeed in an increasingly treacherous competitive market.

Holland is convinced that all the pieces are in place for that shift to succeed, and it's the possibility of success that has brought him out of a comfortable retirement and placed him firmly back on the hot seat.

“McLeod has a shot at surviving, but it's not 50/50,” said Craig Claussen, industry analyst with New Paradigm Resources Group. “If anyone can rally the troops, it's Royce. He's a person who brings a depth of knowledge and leadership that is unique to this industry.”

Holland's history in the competitive telco industry dates back to 1988 and the founding of Metropolitan Fiber Systems, which, with Teleport Communications Group, was the earliest competitive player.

“We were known as bypassers,” he said with a laugh.
Holland is now best known for founding Allegiance, which built a national competitive network to serve small- and medium-sized businesses during the heyday of CLECs in the post-1996 Telecommunications Act period.

“It's hard to believe we are coming up on the 10th anniversary of the act,” he said.
Eighteen months ago, following Allegiance's own bout with bankruptcy, Holland sold the company to XO Communications and its major investor, Carl Icahn, after a brief bidding war between XO and Qwest Communications.

“The Allegiance situation was very different from the one here at McLeod,” he said. “We had $260 million in cash, but it was the covenants with our banks that killed us. The banks weren't cutting any slack at that time. Of course, when Qwest and Carl Icahn came along, we did our duties for our creditors and our senior lenders wound up getting 100% of their investment back with accrued interest. So maybe the banks were smart after all.”

Since the sale, Holland has been much more active hiking with his wife — including a stint in the Alps last summer — and tending to his personal investments than following telecom. When he got the call from executive search firm Heidrick & Struggles, which had been engaged by the bankruptcy court handling McLeod's case, Holland had to do his own due diligence on what had happened to the company with which he once wanted to merge.

“I remember coming here [to the McLeod corporate headquarters] with Dan Yost [then executive vice president of product and marketing for Allegiance] who was absolutely drooling over this facility,” he said. “We came very close to merging in the summer of 2000. Clark was interested in going national, and Allegiance had built a national footprint — it would have reoriented the company at that time, to be top end nationally and all things to all people.”
Ironically, as Holland joins McLeod now, the company has just sold that impressive facility, a 300,000-plus square foot building that is part of what is still called McLeod Technology Park, a commercial development that sits at the south edge of Cedar Rapids, just north of Iowa farmland. The service provider is in the process of moving into a smaller building that it already owns as part of the major cost-cutting that accompanied its prepackaged Chapter 11 filing.
What attracted the native Texan to the Midwestern heartland, however, was what McLeod retains — its network footprint.

Scattered across 24 states from the Canada to the Mexico border and from Washington state east to Ohio — leaving out California and Nevada — McLeod has 700 central office (CO) co-locations, 300 additional COs connected by remote switches, 2873 route-miles of metropolitan fiber and 12,304 route-miles of intercity fiber. It goes head-to-head against two of the four former Bell companies — SBC Communications, now AT&T, and Qwest.

In addition, with its re-emergence from bankruptcy the second time, McLeod shed $670 million in debt. “It's like reducing your mortgage by 90%,” Holland said. The company is now private, owned by the investment firms that originally held the debt.

What McLeod hasn't had enough of in the past is products aimed at businesses, and salespeople, and those two things lie at the heart of Holland's strategy for the company that will probably be his last turn as CEO.

“McLeod's network integrity is world class, and its customer care is also,” he said. “But its product set hasn't been that strong in the past. And they didn't have a lot of direct salespeople — in fact, they had less than 100. At Allegiance, we had 1000. I was surprised that, with the size of the McLeod network and the amount of capital they have out there, in routers, switches and DSLAMs, that they didn't have more people selling. We are definitely going to get more feet on the street, and we are going to have a more robust set of products.”

“We will also increase our agent programs — McLeod has never done much with agents, but we always did at Allegiance,” Holland said. That will include working with value-added resellers to reach smaller companies and larger partners at the upscale end of the market.

In building up the sales force, McLeod will target its hiring on sales experts that focus on the business customer. The company is no longer soliciting residential customers or low-end businesses, although it will sell service to those that ask for it. The closest Holland comes to criticizing past McLeod management is to say that the company only tweaked its strategy following the first bankruptcy, when maybe a greater overhaul was needed.

“Since the first restructuring, the focus of the company hasn't changed a lot,” he said. “Then the balance sheet became the albatross they couldn't slay without restructuring again — and that takes up a lot of management time, as I know well.”

So after first trying to be a national phone company and then a regional voice and data provider to the full range of customers, McLeod is now focused on business customers, particularly those with multiple locations and even more particularly on those that have a footprint matching McLeod's network.

“We have to be laser-focused on small- to medium-sized businesses, T-1 and up,” he said. “We're not talking about beauty shops or stores with a single line and a voice service. It's no longer, ‘Show me your phone bill, and I can save you some percentage of that.’ It's more, ‘Let me show you how to build a network that can enable your business to grow and compete.’ That's a different way to sell and a different mental framework.”

With that customer base, Holland said, the service provider can bring the strength of its network to bear on the competitive market and compete with AT&T, Qwest, XO Communications and just about anyone else.

“We can do it better at a little better cost than the ILEC,” he said. “And we can provide better customer care. Before, we were trying to save you money. Now we're going to offer you something that you'll have trouble getting from the competition.”

On the product side, McLeod will leverage its converged access platform, launched last March as the Preferred Advantage Dynamic Integrated Access product, to enable businesses to cost-effectively converge their voice and data services onto an IP platform. Dynamic Integrated Access packages local service up to T-1 or primary rate ISDN with high-speed Internet access of up to 6 Mb/s, long-distance service including free calling among internal sites and branded e-mail accounts. It also offers a wide range of business service options, including voice mail, calling cards, toll-free service and conference calling.

This winter, the company will roll out IP virtual private network service, hosted PBX service and security offerings that build on its IP integrated access. Many of those product offerings are being developed in the company's network planning center in Houston, which is run by Todd Wilkens, Roy's son, who joined McLeod when it acquired Split Rock Services.

While admitting that McLeod is hardly first-to-market with converged voice and data services, Holland believes the company still has time to make inroads, particularly with business customers who may be reluctant to jump into the new technology pool.

“This isn't revolutionary — but as I've always said, it comes down to a matter of execution,” he said. “We do have advantages. The broad footprint gives us an advantage over someone like Global Crossing, which doesn't have connections to the customer. Having the network there is important to us.”

The move to IP is critical to McLeod's success, said analyst Claussen.
“Fortunately for these guys, technology has marched forward, hosting IP services is a cost-effective route for them,” he said. “It's not painless, but compared to the old TDM, Class 5 world, where it was pretty near impossible to get resale customers onto your platform, the softswitch environment does permit them to get these guys onto their network and realize higher margins. They are going to have to buy access transport facilities from the incumbents — how much does that eat into their margin? I don't know, but it's not as much as buying everything, like they did in the UNE-P world.”

McLeod will continue to buy some last-mile facilities from the incumbents — it has a commercial agreement with Qwest and would like to have one with SBC, but hasn't to date. Holland expects to go head-to-head mostly with those two companies and also with XO, now home to his former Allegiance assets and customers. “XO arguably has the best reach — they've got a little better reach than we do,” he said. “It will be interesting to see if we see Verizon in places like Chicago. I don't know if AT&T and Verizon are going to compete against each other on a broad scale out of region right away.”

Holland doesn't think customers are overly concerned with the company's financial problems. “As long as it doesn't affect the network integrity or the quality of service, I don't think the customer relationships are affected,” he said. “I don't think the perception of McLeod is any worse for this. Consolidation has diminished the amount of competition, he pointed out. “We like not having to compete against both AT&T and SBC,” Holland said. “I really think we need to focus on our business and not on our competitors. I've always believed this is more like playing golf than playing tennis — it's you against the landscape. If AT&T or Qwest was our only opponent, it would be more like us against them. So I think we are better served focusing on our own game plan.”

Holland is likely to commute between Texas and Iowa, as he once commuted between Omaha, Neb., and Oakbrook Terrace, Ill., for MFS.

“We are spread out from Texas to Iowa now — we have our network planning in Houston, our network operations in Tulsa, where Roy built it, and our customer call center, back-office and production functions here in Cedar Rapids,” he said.

Having missed one opportunity to work with McLeod, Holland definitely seems to be relishing this chance. And it gave his old friend, Clark McLeod, a chance for a bit of humor.

“He e-mailed me to ask if I was going to change the company's name to HollandUSA,” Holland said.

While many within the industry expressed surprise that Holland would tackle this challenge now, Claussen thinks it makes sense.

“Royce can only be out of the game for so long,” he said. “He's a leadership guy — he's not a support player. This is a leadership challenge for him. If anyone can do it, I would suspect that Royce would be able to do it with leadership skills and his knowledge.”



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