'Everybody who's anybody in Canada has gone through Nortel'

This is the final instalment of a three-part series on the history of Nortel Networks Corp., and the legacy of its world-renowned research and development.

The research continues in Nortel Networks Corp.'s labs on its Carling Avenue campus.

Legacies of past years line the labs: the DMS-100 digital switch, now far surpassed by the Communication Server 2000 and its descendants. Electronic maps demonstrating how far Nortel's connections reached during the boom years dot the walls.

"Ottawa has always been the heart and brain of the (research and development) machine of Nortel," said Samih Elhage, president of the company's carrier voice-over-Internet protocol (VoIP) and applications solutions businesses.

Yet one thing was missing from the large, well-lit hallways underneath Nortel's signature dome: people. At its height in 2000, the company had close to 15,000 of them streaming through the labs. Today, that count is well under 4,000 and dropping.

Explosive growth through the 1990s fuelled Nortel to an untenable situation when the tech bubble burst around 2001. Suddenly, there was no more economic growth to ride.

It was time to change priorities, Mr. Elhage explained.

"We had to shut down specific programs because we had to reduce our costs. We had to sell some of our businesses, so mainly we sold the access network business and we shut down multiple products," he said.

For the most part, these included products with a long lead time: things that would not generate money for perhaps five or 10 years. It's a move that Mr. Elhage argued was necessary for the company's survival at the time.

Unfortunately, that plan didn't pan out.

Leadership loss

Just before the crash, said a number of Nortel alumni who worked at the telecom company at the time, many vacant spots existed for middle management positions.

The situation became particularly exacerbated after the research arm of Nortel and Bell Labs, Bell-Northern Research, was absorbed into Nortel in the 1990s, said Marco Pagani.

"You need business-centric leaders who have sufficient understanding of technology breadth - not depth - and good enough management capabilities to allow really stellar technology guys to build the technology without prescribing to them what they've got to do," said Mr. Pagani, who headed up the optical Ethernet division before leaving in 2003.

"Building a special whiz-bang unit for a one-up customer is not going to make a business, but identifying a representative customer of a business domain that is sufficiently large - that warrants the development of a product - is the mindset that is required. It sounds obvious, but it was very rare."

Mr. Elhage argued it was tough to attract the right talent at the time, given the way firms were outbidding each other for top people. One California firm was even giving away cars as a signing bonus for tech executives, he recalled.

But as the bricks surrounding Nortel's business began to crumble, the company divested itself of units and shrank.

Employees began wondering about their jobs, and the healthy competition that used to spur innovation - some said - turned into in-fighting.

Pat DiPietro, who was fresh off a position as president of 3G Wireless at the time, said he tried to turn the culture around. For example, his division launched a radio network controller - a brand-new product - ahead of schedule despite the fact they were six months behind when Mr. DiPietro took it over.

But globally, the dissension and bureaucracy tended to slow the product cycle, he said.

"If we had changed the culture to enable people, we would have got products done much more quickly," said Mr. DiPietro, who is now a managing general partner at VenGrowth Capital Partners Inc.

"If we had allowed them to be collaborative with outsiders, we would have got things done faster, (especially) if we had allowed the developers to deal directly with customers. My group was one of the few to do that."

Financial flubs

In 2002 - the same year Nortel slashed 3,500 jobs - a number of financial mismanagement problems within the executive suite began to come to light.

On Feb. 11, newly minted chief financial officer Terry Hungle announced his resignation after Nortel discovered he had converted some of his personal retirement investments outside of the window imposed upon employees.

But the problems ran deeper than that. Just over a year later, in October, Nortel said in a statement that it needed to restate its financial results for 2000, 2001, 2002 and the first half of 2003.

The major sticking point was around US$900 million in liabilities that were not recorded or released correctly in earlier audits.

In part, the company blamed the massive restructuring that took place between 2001 and 2003, which included reducing the global workforce from 94,500 to 35,500 people.

The restatements gave way to executives refunding billions of dollars in bonuses, several firings (including the CEO at the time, Frank Dunn), an investigation by the U.S. Securities and Exchange Commission and millions of dollars in fines and lawsuits.

"This created significant issues for us," said Mr. Elhage, who said this was part of the reason Nortel suffered so badly financially in the last few years.

"This was really where we needed to put more rigour, if you like, in our financial compliance infrastructure to ensure it would not happen again. But unfortunately, it happened on a couple of occasions."

Credit crash

Despite the fines and frequent reaudits, Nortel still continued to put out products that generated billions of dollars in sales.

Of note, said Mr. Elhage, was the number of top sales rankings globally that its divisions achieved as late as 2005: number one in carrier VoIP, number two in optical and number two in enterprise data networking, among others.

With Mike Zafirovski assuming the helm in 2005, the company's operating cash flow turned around to positive in 2007 - $200 million on the plus side.

But it was the market crash in the fall of 2008 that proved to be Nortel's undoing. Payouts to the pension plan, now $1.6 billion in debt, became too much.

"We tried multiple attempts in order for the company to be merged with others or to be sold to others and so on, but these did not pan out for many reasons," said Mr. Elhage. "One, because of the liabilities that the company had, and second, the market conditions were not attractive."

Nortel filed for bankruptcy protection on Jan. 14 and requested its stock be delisted from the Toronto Stock Exchange. Once trading at $1,200 per share, the stock was listed for little more than a nickel.

As the company divests itself of its divisions - beginning with the $1.13-billion sale of wireless to Ericsson earlier this month, if it's approved - the legacy of the company will be in the people who used to work there.

A number of them have gone on to form startups and take on senior positions at other companies - and, said many former employees, will continue to do so in years to come.

"Almost everybody's who's anybody in Canada has gone through Nortel at some point in time," said Ibrahim Gedeon, chief technology officer at Telus.

The only question is where these people will go next.