Nortel: How a Fabled Company Fell So Far

Dozens of news stories have run in recent months speculating about “what went wrong with Nortel Networks Corp..” So we decided to let ex-Nortel employees and several industry players tell it in their own words. Our oral history reveals the point when the 114-year-old company really started to go off track: a cultural shift from quality product output to a focus on shareholder value. Not to mention, successive years of bad management and financial scandal.

That Nortel is headed for a breakup of some kind is no secret. What no one does know is who will end up owning the storied Canadian telecom equipment maker, and which divisions. Indeed, Nortel was slated to emerge from bankruptcy this month but now it will go up for auction because several entities oppose a Nokia Siemens Networks takeover of the wireless assets.

The tale of Nortel has spun into a soap opera; however, unlike those far-reaching storylines, this one stands to impact real people in real ways. Pensioners, many of whom, sources say, are widows of former Nortel workers, could lose up to 40 percent of their income. (The average Nortel pensioner is 71 years old, receiving $1,000 per month.) Canada is watching its R&D cash cow and one of its top job creators disappear – scenarios that are never welcome, yet especially not in a recession. All the while, no one seems to be holding CEO Mike Zafirovski, his senior executives or the Nortel board of directors accountable for the downfall of the company. Of course, Nortel’s undoing did not happen in just the past three years.

In Their Own Words

On what went wrong, overall, at Nortel…

Nadine Manjaro: I was struggling with that myself. I did a report and looking at their revenue, they have pretty strong revenue, and CDMA is lucrative in terms of profit margins. I think it was more mismanagement. They blame the decline in the economy and cutbacks in CDMA from operators, but I think it was mismanagement. When I look at I overall, that had more than $10 billion in revenue last year, so it’s hard to understand why they went into bankruptcy. … The company had a strong base, it had a lock on the North American market and they were expanding. Other companies have suffered equally. Even Alcatel-Lucent’s numbers aren’t great but it’s not the CDMA decline that caused the problem – with Alcatel-Lucent it was the merger. It’s how you manage the company.

Manjaro serves as senior analyst of mobile networks for ABI Research and has tracked Nortel throughout her career. She’s been known to challenge Nortel executives for holding fluffy press conferences that she thinks really are aimed at boosting the company’s value to bidders.

Mark Evans: It’s hard to pinpoint what actually happened. You could suggest the company actually went off track at the height of the telecom boom, during the acquisition spree when it bought a couple dozen companies. And that was the beginning of the end, when it started to lose its strategic focus. It tried to be all things to all people rather than having a very focused approach. That continued after John Roth left as CEO, it continued under Dunn and Owens. There was an opportunity in 2005 when Gary Kunis and someone else came over from Cisco – they had an ambitious plan to overhaul Nortel and get it focused on enterprise. … But it stayed the same old Nortel. The market has changed and the competitive landscape has changed.

Evans writes the All About Nortel blog. He also reported on Nortel for Canada’s National Post. Evans gets hold of internal Nortel documents such as memos and, perhaps most memorably, Zafirovski’s first e-mail to employees.

Peter Jarich: I’ve thought about that myself a lot and I don’t know that I have any good answers. In wireless, I think a lot of it has to do with timing. Alcatel-Lucent was first out there with CDMA and they captured the lion’s share of the market. Other people were earlier to market with things like GSM and WCDMA and managed to do better. And I think that kind of stuff just put them in that trailing position, and in wireless at least it’s all about scale. Unless you can deliver something really amazing like the price benefits and innovation coming out of China, it’s all about scale and they just didn’t have it. … Zafirovski said, ‘I don’t want to compete in any business where we’re not a top three player.’ What does that mean? Does that mean you just don’t care about it? I think there was a lot of, I don’t want to say indecision but awkward positioning of, where does that leave you and where does that leave me as your customer?

Jarich covers telecom equipment matters for Current Analysis as a research director.

Jeff Wiener: From a reseller perspective, I think Nortel was ignoring their dealer base and distribution channels. There was poor sales support over the last few years. And although a lot of people may beg to differ, there was gradually declining product quality. That took years to happen … but we experienced a lot of problems with Nortel [telephone and voice mail] products. That stemmed from decisions to farm out manufacturing. … The quality slipped tremendously and there was very little support in trying to fix those issues.

Wiener is president of Digitcom Canada, one of that country’s largest phone equipment resellers. Digitcom sold Nortel products almost exclusively for seven years. Over the past year, though, Digitcom has distanced itself from the supplier, shedding its authorized reseller status and turning instead to Cisco Systems Inc. and Avaya Inc. Those companies make equipment that doesn’t need constant patches, Wiener says, and his salespeople tell him it’s “so refreshing” not to have to pretend to customers that Nortel systems won’t go bad on them. Wiener also writes a blog in which he often discusses Nortel.

Ken Shaw: I think we went from a company based on R&D and new products to a company based on the management of earnings.

Shaw is a former Nortel employee active in the fight for pension benefits. When he retired in 2000, he had racked up 35 years of service. Shaw was director of operations for a group within the enterprise networks division when he stepped down.

Alan Stewart: At the time I retired, I looked at things that were changing like organizational structure, which went from a product line-based organization to a function-based organization. We were used to being a factory unit responsible for a product line from cradle to grave. There were set objectives and a three- or five-year plan. … It was clear what strategies and tactics would be used to achieve those goals. But then the people started having to report out to as many as five or six vice presidents scattered all over North America. This started under Paul Stern, an ex-IBM guy. His organizational concepts were similar to the IBM setup at that time. It detracted from the clear focus of our business unit.

Stewart worked for Nortel for 31 years, retiring in 1993. His last position as a direct Nortel employee was as director of quality in the business products division, which at the time was part of the enterprise networks group. He is one of about 15,000 pensioners fighting to save workers’ benefits through a newly formed group called Nortel Retirees Protection Committee.

Tony Marsh: I officially retired in 2000 but moved out of the mainstream in ’93. That was just about the time Paul Stern left the company. … I can say the catchword inside the company was “shareholder value,” which was really a code word for get the stock price moving up. You were rewarded for your impact on the stock value. … Before that, a very significant part of the company’s revenue every year was going back into R&D, with the result that Nortel was preeminent in digital switching, fiber-optic equipment. But once you start chipping away at that ethic inside the company, you lose your edge. … When you couple that with the feeding frenzy going on in the late ‘90s for acquisitions and trying to integrate those into the company, that’s where the chaos really starts, in my view.

Marsh retired from Nortel in 2000. He spent 30 years with Nortel; his last title was assistant vice president of university interaction. He now works with Stewart and Shaw on the Retirees Protection Committee, meeting with government officials and otherwise lobbying on pensioners’ behalf.

To read more, from Nortel’s limp WiMAX strategy to management failures, click here or on the source link below.