Nortel’s failure was years in the making, Telfer study finds

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David Sali
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Management blunders, market changes and a “black cloud” of eroding customer confidence were just some of the factors that ultimately led to Nortel’s epic collapse, a new report from the University of Ottawa has found.

Jonathan Calof is a professor at Telfer School of Management.

Prof. Jonathan Calof of the Telfer School of Management, the lead author of the report, said Monday the university’s three-year study – which also included members of the engineering and law faculties – revealed that the seeds of the doomed telecom giant’s demise were sown long before the company finally filed for bankruptcy in 2009.

“We saw a company that failed over a long period of time,” he told a news conference. “Failure is temporal. Don’t look at the last man standing and say, ‘It’s all your fault.’ Failure is complex. Don’t try to blame this on one simple factor.”

Prof. Calof and his team of researchers collected data from hundreds of participants, including nearly half of Nortel’s key executives from 1997-2009 and dozens of customers as well as competitors, academics and journalists, to try to answer the question of why the tech behemoth collapsed.

“I really thought we’d come up with one or two reasons why Nortel failed,” said former Nortel CEO Jean Monty, who led the company between 1993 and 1997 and helped fund the Telfer study. “We’ve come up with dozens. It’s a little bit of all of them together that made the company fail.”

Though the company’s financial woes began to snowball after a series of acquisitions spearheaded by CEO John Roth in the late ’90s, its problems started well before then, the study said.

Nortel’s R&D department was renowned for pioneering cutting-edge technology such as the digital switch in the 70s and 80s, the researchers noted.

But because the company didn’t face much competition, it called all the shots, telling customers what they needed and delivering new products only when they met the company’s exacting standards. Its majority shareholder, Bell Canada Enterprises, provided cash whenever necessary and had well-heeled clients who readily agreed to whatever price Nortel demanded, the researchers found.

“This model works if people are prepared to pay,” Prof. Calof said. “This model works if there’s limited competition. But it bred arrogance and lack of financial discipline – that’s the bottom line.”

A change in organizational structure in the late ’90s and the firm’s aggressive acquisition strategy under Mr. Roth made Nortel the No. 1 player in the telecom field.

But “this dramatic growth came at a significant cost,” the report said. “It was a complete departure from Nortel’s established skills base, culture and history of developing its own products.”

By splitting the growing enterprise into various divisions and decentralizing R&D, the researchers concluded, the Nortel brass created a series of fiefdoms competing against each other in a bloated company that found it increasingly difficult to adapt to customers’ needs.

“As a result of the escalating costs, the focus on growth as opposed to profitability and cash flow, and the arrogance and lack of financial discipline that developed during the 1970s and 1980s, Nortel did not have the resilience to deal with the changes that were to arise in the market,” the report said. The company’s free-spending ways saddled it with “financial ratios that were among the worst in the industry.”

That left the firm “ill-prepared” to compete in the emerging wireless sector, the report said. Instead, Nortel switched to “crisis management” mode, the researchers said, focusing on cutting costs rather than responding to market demands.

“Trust in Nortel as a company that was focused on its customers, delivering where others could not deliver, had been broken,” said the report. “Beginning in 2002, a ‘black cloud,’ as customers referred to it, was forming around Nortel.”

The firm still had great products in its R&D pipeline, former executives told the researchers, but senior management had lost touch with the innovators who had made Nortel a trailblazer in its earlier days. Many innovations never made it to market – or later became huge successes in the hands of competitors.

“Management became detached from the grassroots technology,” said Peter Chapman, a longtime Nortel engineer and one of the researchers on the study. “That, to me, is one of the great disappointments of this company.”

By 2005, when clients were setting their sights on emerging 4G and LTE network technology, “they looked at Nortel and they said, ‘I don’t think you’re going to be around for more than five years,’” Prof. Calof said.

Nortel’s collapse sent shockwaves throughout the high-tech industry that are still being felt today, he said. Silicon Valley North has never fully recovered, but ripple effects extend even to workers at other firms who worry about the future of their company pension plans, for example.

“If anybody wants to look at the impact, it is broad,” Prof. Calof said. “It goes social, it goes business, it goes international. It’s huge.”

Sidebar

Key lessons learned from Nortel’s demise, according to the University of Ottawa case study

In thinking about how one wants to grow a business, make sure strategy and culture are aligned.

In a fast-moving environment, one has to maintain situational awareness on customers, competitors and the market.

Understand your competitive advantage and protect it.

In a technology-driven company, senior management needs to listen carefully.

When it comes to customers, one needs to strike a balance between meeting their current requirements and future needs.

Watch the bottom line, not just in bad times but also in good times.

Boards are the last line of defence and as such should make evidence-based decisions.

Customers pay attention to how suppliers behave.

Business leaders need to know when and how to shift their own corporate culture.

Manage the ‘business,’ especially during crises.

Knowing when to retrench is essential in rebuilding resilience and in reducing and eliminating a black cloud of customer doubt.

Organizations: Nortel, Telfer School of Management, Bell Canada Enterprises University of Ottawa

Geographic location: Silicon Valley North

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  • Ben
    May 26, 2014 - 12:08

    It's interesting to see all of these small steps to failure. We had come up with many of the same, but not all. The world of telecommunications is rapidly changing and requires constant evolving to keep up. We have an article on 'what happened to Nortel' with some of our thoughts as well - http://blog.bicomsystems.com/what-happened-to-nortel/

  • MM
    March 20, 2014 - 01:18

    Importance of international markets also got lost in the noise; competition low-balled every international contract until Nortel breathed its last; now they're reaping via hefty services contracts (beta testing fixes on live networks as well)!