Nortel doomed by tech blind spots, buying binge and failure to listen to consumers

U of O study issues final report

When the management of Nortel Networks Ltd pulled the plug in 2009, Canada's largest technology company had $2.5 billion in the bank and a treasure trove of patents worth billions more. Its stable of world class scientists and engineers continued to lead the world in key areas such as 4-G and long-term evolution (LTE) wireless technology as well as long-haul optical and other fibre optic transmission technologies.

But between 2002 and 2009 no significant new products were released and the company proceeded to commit "one blunder after another". The period also witnessed dramatic changes in the telecommunications landscape as technology development became increasingly determined by consumers rather than large telecommunications service providers.

A multidisciplinary team at the Univ of Ottawa has spent more than four years applying several different "lens" to make sense of the decline and ultimate demise of the telecom giant. The researchers interviewed former company executives, competitors and major customers to examine the crucial years between 1997 and 2009. Their initial overview report was issued last year (R$, March 31/14) and was followed by reports examining the governance and business intelligence aspects of Nortel's slow demise.

Late last month, the team released its fourth and final report on Nortel's technology and technology management. It found that technology had little to do with the company's failure; neither did its management of technical processes. Instead, the report pointed the finger at business management practices that were imposed on the firm's engineering assets. This was compounded by a host of other internal and external factors as the telecom technology landscape evolved rapidly in the early part of this century. That evolution coincided with the rapid growth of Internet Protocol and the shift in market demand from services providers to end users.

A disconnect between Nortel's rich R&D expertise and upper level management as executives became consumed with the firm's soaring stock price, a series of expensive acquisitions and in the latter years a series of financial restatements that degraded the once stellar corporate brand.

"Nortel released five-to-six significant products a year in its heyday but ... Cisco frightened them and they did crazy things. The acquisitions were disastrous," says Dr Peter Chapman, a senior manager in the chief technology officer's (CTO) department at Nortel. "Nortel had a big R&D shop which was one of the leading labs in the world ... The rationale for the acquisitions was bizarre to say the least. They purchased the companies to keep Cisco from getting them."

"Nortel did not fail because of its technology or because of allegedly wrong choices in terms of specific technologies. The basic technology issue was the erosion in the senior management's confidence and willingness to continually recognize and appreciate the strength of the in-house technology capability" - U of O Nortel Study

Between 1997 and 2001, Nortel went on an acquisition frenzy, purchasing several dozen firms for $32 billion in a series of mainly stock transactions. Most of its acquisitions were start-ups, some with technology that barely worked, the report concluded.

"We proved beyond the shadow of a doubt that Nortel's systemic problems had nothing to do with technology or technology management," says Peter MacKinnon, a research associate at U of O's engineering faculty and co-director of the Nortel research project. "Nortel had skilled, diversified people and well-intentioned teams that understood the dynamics of a changing industry from the CTO down."

Preoccupied by a soaring stock price and flurry of acquisitions, company executives paid scant attention to technologies being developed in-house. At the same time, Nortel shifted its internal R&D away from so-called "blue sky" research towards late life cycle products and existing and maturing product lines.

The shift was sparked by the dismantling of Bell-Northern Research labs - Nortel's in-house R&D and systems engineering function.

"The future and emerging domain was contracted inside and expanded outside through acquisitions, most of which failed to yield technical advances or future revenues," states the report.

Chapman witnessed first-hand the impact this shift in R&D was having on the company. He also saw the allure of Nortel's acquisitions binge between 1997 and 2001 when $32 million was expanded (mostly in stock) to acquire a series of US- and Canadian-based tech start-ups.

"The company was trying to cut its R&D budget by looking at its ratios and those of its competitors. But money needs to go into product development and you get it back many times over," says Chapman. "Companies were bought because it was part of an annual deliverable. The board (of directors) couldn't say no because the stock would go up with every purchase. They were pandering to the stock market."

Chapman says Nortel was uncomfortable letting customers influence its technology development, though many in the lab understood that what clients wanted would require a major push on Internet Protocol and wireless technologies.

"The executives didn't want to hear about this new consumer empowerment world. Everyone wanted the web to serve big multinationals," says Chapman. "They realized they had to be more agile and get more products out more quickly and they said all the right things but they didn't follow through so they bought companies instead ... The acquisitions binge defocused them and the financial restatements defocused them."

By 2007, the executive suite realized that the acquisitions strategy wasn't working and began shifting its R&D focus back towards emerging technologies. But by that time it was too late. The "black cloud" of consumer dissatisfaction examined in the study's initial overview report had taken hold and competitors began grabbing a growing share of Nortel's key market segments

When Nortel filed for bankruptcy in 2009, customer orders understandably disappeared. And with no detailed plan for emerging from protection, executives simply pulled the plug. Several desperate rescue attempts to revive the firm failed and the sell-off of its assets commenced.

"Nortel was a failure 20 years in the making," says Dr Jonathan Calof, co-director of the Nortel research project, adding that the company's demise occurred in spite of the quality and dedication of its R&D staff. "There was diehard employee loyalty and extraordinary in-house technology throughout the study period."

With the release of the final portion of the Nortel study, U of O researchers are making further use of the knowledge and data collected. MacKinnon says several papers are currently being written and the study's grounded theory methodology is being closely examined for adaptation to other research areas.

MacKinnon says that despite the academic research excellence directed towards the Nortel demise, the study would never have been possible without the cooperation of many former company employees. "They were all trying to do their best during an incredible tumultuous time," he says.

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