Innovance Networks has laid off 80 people, 27 percent of its present workforce, in what CEO Peter Allen calls a "rebalance" between needed resources and spending.

The layoff is the second big one to hit Innovance this year (see Innovance CEO: Layoff Was a Tuneup), telegraphing yet again the message that a recovery in long-haul technology spending is nowhere to be seen. In all, the company has cut about 31 percent of the 335 employees it had in January 2002.

"Clearly... market uncertainty in general has increased," Allen said. The outlook on carrier spending, he says, is murkier than it was even 45 days ago. And there's no immediate prospect that carriers will be investing in the kind of next-generation long-haul transport equipment Innovance has to offer -- at least for a few months.

In the meantime, Innovance must cope with the downturn. Its workforce reduction is an attempt to "rebalance," Allen says, matching up what the company needs to have in terms of staff resources right now against the level to which it needs to cut its cash burn rate.

Allen concedes that even more cuts may be needed, depending on the pattern of carrier demand. "We're prepared to act as we see market dynamics change," he says.

Innovance cut staff across the board in its Ottawa and Piscataway, N.J., facilities. Allen admits the hatchet fell heaviest on the company's manufacturing operations, which include folk involved in finishing and verifying switches that are manufactured by third-party fabrication plants.

Since Innovance shipped its first prototypes to carrier test labs in late May (see Vendors Aim to Cut Costs in Core), these kinds of finishing operations won't be required until customers that are now kicking the tires start ordering products for real. Innovance must wait on this feedback before it can even think about growing again.

Indeed, as Allen says, no other options are open. The funding door has closed, at least for now. Despite being able to score about $130 million in funding to date, including $55 million in February 2002 (see Innovance Scores $55M), Allen says Innovance can't expect more cash to come its way unless it's got paying customers -- and ones of the right ilk -- onboard.

"Everything is driven around real customer traction," he says. "If you show that, things you need will be available to you."

Innovance isn't alone in waiting for its ship to come in. Another well-funded Ottawa startup in the long-haul space, Ceyba Inc., has also felt the pain of layoffs and cutbacks (see Startups Adjust to Long-Haul Reality).

Startups such as Innovance have been hit hardest by the downturn because they specialize in core network capacity, where the most extravagant excesses of the boom era were focused. What's more, most next-gen equipment for core deployment will call for carriers to commit to a new network architecture that's different from their current, Sonet-based gear. So far carriers have balked at any such changes, as they drop all but the most urgently needed network renovations, which typically involve metro area networking gear.

But Allen thinks change is on the way. He remains "cautiously optimistic" that ongoing consolidation in the carrier market will encourage new investment in long-haul capacity by the end of next year.

By that time, he says, big carriers who've survived the current round of bankruptcies and restructurings will have absorbed some of their fallen competitors and will be ready to take the next step toward offering services to an expanded customer base. Then they'll see that it's more economical to invest in gear that's more scaleable and flexible, rather than tacking on more of the same old telecom kit.

"We think it will be the second half of 2003 before processes, including trials, lead to service deployments," Allen says.

— Mary Jander, Senior Editor, Light Reading
www.lightreading.com