Thoughts on Nortel

By Mark Evans | Published: January 19, 2009

A friend of mine, whose knowledge of Nortel and its technology is truly impressive, offered some thoughts about what management and investors should take away from the company’s troubles:

Management lesson: evolution matters

Companies that fail to evolve with their customers’ changing needs or the changes in the industry will suffer a dark Darwinian fate. Nortel was actually very good at evolving and anticipating industry change in the ’70s, ’80s and early ’90s. However, the company failed to address the single dominant change since then – the commoditization of technology brought on by IP technology and the emergence of Chinese competitors. Clearly commoditized pricing trumped so-called superior technology in the eyes of the major telcos of the world.

Investment lessons

1. Cash flow trends did not lie.

Nortel’s cash flow statement showed declining or steeply negative cash from operations for several years. In particular, the so-called turnaround on the income statement (rising gross margins, reduced EPS losses) from 2005-2009 was clearly not represented by cash trends.

Various accounting gimmicks such as deferred revenue, inventory writeoffs and perpetual ‘one-time’ charges painted a picture that was not consistent with reality and obscured Nortel’s declining business.

2. Bond yields did not lie

Since Sept., 2008 the bond yield for Nortel issues soared from distressed levels (1,000 basis points above treasury) to astronomical levels (50%+ yield is too good to be true for very long). Clearly the bond market was signalling very high risk of Nortel’s failure.

3. Management teams do lie, to themselves

Nortel lived in denial of the fundamental negative trends in its business for the past eight years or so. By failing to adequately address the big changes in the industry, Nortel was essentially lying to itself. As a result, the wrong ideas were put forward because Nortel was trying to solve the wrong problems and trying to recreate the successes of the past while ignoring commoditized pricing trends. (i.e. Let’s become more efficient. Let’s crank out a great new optical product. Let’s catch the next wave of wireless technology upgrades, etc.)

Denial is the biggest enemy of big companies and it is equally damaging for Nortel as it is for General Motors, although the rate of decline can vary.

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  • Le_Dude
    The commodity problem goes back to Bill Connors - Idiot in Charge of Enterprise Networks in the late 1990s. Bill decides to cut the price of Nortel's new Bay Networks routers by 50% - claiming routers were a commodity. At the time Bay Networks routers were pulling in $500M+ per year, and had double digit market share. Router buyers, unlike Nortel execs knew that "business class routers" were not commodities and flocked to Cisco. Nortel has since invested close to $1B in routing technology without releasing any thing new in the space.

    Cisco (unlike it's consumer products division Linksys) makes "widgets" that have significantly more features than Nortel's competing products and Cisco's products sell for a higher price. Nortel's problem is not it's products, it's Nortel's inability to market and sell the products it has.
  • horace_grimswold
    As mentioned before, Mike Z is nothing more than a case study of Al Dunlap's business principles implemented in action. What worked at Sunbeam, clearly worked even better at Nortel. Mind not the Sunbeam board showed less willingness to walk right off a cliff at the last minute than Manley, Pearce, and company have. But with the only remaining shareholders being passive index mutual funds and antique collectors snapping up share certificates to be sold at flea markets, it's no surprise there wasn't a shareholder revolt.
  • broadbandbill
    Related to #3:

    Mike Z frequently quoted Jim Collin’s “Good to Great” as his management bible (if ‘good is the enemy of great’; BK must be the enemy of bad). Here are few points from the book and my related comments (Notes):

    • “Level 5 Leaders” - leaders who have both “personal humility” and “professional will”. These are not rock-star leaders whose companies go into decline when they move on. They are diligent and hard working - more bite than bark. Celebrity leaders often work for a time, but appear to be damaging in the long run, because they don’t create sustained results.
    o Note: not the case with Hackney, Roese, Flaherty, others

    • Get the right people on the bus - that has to happen before the “what” decisions are taken. That can change if you have the right people, but the wrong people will certainly make the enterprise fail.
    o Note: As is the case with Hackney, Roese, Flaherty, others

    • You must always be willing to “confront the brutal facts”. Don’t ignore reality in favor of what your hopes reflect it to become. Only by having accurate information can you achieve success.
    o Note: not the case with Hackney, Roese, Flaherty, others

    • The “Hedgehog concept” means having a simple, extremely clear concept of what their business is.
    o Note: not the case with Roese, others (WiMax, 4G, IMS, IPTV, etc.).

    I have a new book recommendation for Mike and his gang: Marshall Goldsmith’s ‘What Got You Here, Won't Get You There’. 'There' as in not YOUR THERE!...--bb
  • McBeese
  • McBeese
    Show me one technology-oriented company in a transforming market segment that is successfully led by outsiders who aren't experts in their respective business segments, and/or directly supported by those who are. I can't think of one example. Nortel is nothing but empty suits at the top. Zafirovsky, Hackney, Lowe, and Wendt are/were all administrative leaders. Administrators don't have the ability to make strategic course corrections. John Roese was a geek with far too narrow a range of expertise to cope with Nortel's broad portfolio - and the leadership and interpersonal skills of a 12-year-old. George Riedel is simply invisible and ineffective. Not sure why. Denis Carey is a leech. What exactly is his value-add... does anyone know?

    The board of directors is just as weak.

    The destruction of Nortel was a leadership-driven exercise and accountability is at the feet of Zafirovsky, the worst CEO Nortel has ever known. The board shares equally in the blame for their selection of Mike Z as CEO and for their steadfast refusal to do act as Nortel continued in a 3-year dive to bankruptcy.

    The signs were all there for years. Why did the board not act?
  • LonelyOpsGuy
    ANN: Agree 100%.

    Mark: Is it possible to get an interview with some BoD members so they could share their side of the story? I'd be interested to know what they have to say in a moment like this. Afterall, Nortel pay their salaries and they should be held accountable to something, don't they?
  • upset_with_NT
    Its hard to "embrace commoditized pricing trends" when you refuse to make commodities

    While competitors make inexpensive "widgets", NT makes "widgets on steroids" packed with features most customers don't want, at 5-10x the price.

    Add to the fact that these unneeded additional features are buggy, obfuscated by poor documentation, and housed on a website that makes it impossible to find even the most common documents...

    ....and you have a recipe for disaster...

    .....and that's exactly what has been cooked up by the "chefs" at the top
  • Casual_Observer
    The question people should ask themselves is that if Nortel is the only company that this could happen to. Many of the accounting rules that Nortel used are being used by many many companies in different sectors in order to make things look better than they are. Welcome to the ponzi economy.
  • less
    I would warn to quaintly generalize this is a "typical global corporations" scheme

    Countless Mom 'n' Pop shops start out with the noblest intentions but fail, not because one evil behemoth like WalMart underprices them, but because people lack the talent to do business, get lazy, greedy, can't keep simple books, reneg on their estimates halfway thrrough job, skim the books they keep, go on vacation with the first paycheck, etc.
  • less
    I think employees everywhere should be more pro-active and hire some pros to write "I believe!" on decent whiteboards (i.e. 100% biodegradable, natch) maybe draw a little secular bear scat with a bright red slash through it. I trust the masses to be that smart.

    Welcome to the samo human race.
  • LonelyOpsGuy
    Mark: I commented in the past about the Nortel's missed tech boat. I will only say one thing.
    If look behind a PDTC (a DMS-100 peripheral) you will find hand-soldered wires crossing the circuit board. And yes, you can still order it today if you want. No, we're not in the 80's, this is the 21st century and you can still order equipment with hand-soldered wires crossing the circuit board.
  • less
    But unlike, say, ATCAs, DTCs can be moved into global villages and continuously manhandled by folks who never heard of ESD straps and frame grounding. Walking barefoot works just as well, tis said.

    Plus, the latches on their cards won't shut down the entire DTC like the flimsy ones on ATCAs can if one so much as gives them a dirty look.

    Made in overseas they are, the ATCAs.
  • LonelyOpsGuy
    Ouch!
  • ExNtrl
    This sounds like a good product for low cost center since it obviously requires manual labor. Might even be a cost savings :)
  • LonelyOpsGuy
    The point here is not the manual labor or the hand soldered wire itself. Is the number of PEC codes that shut down any supply chain. The energy that Nortel needs to manage this supply chain go way beyond in having parts in shelves. Here's the rationale:
    - Engineers spend much more time putting PEC codes together over Excel spreadsheets than actually speaking with the Customer to understand his needs.
    - Project Managers spend much more time tracking shortages than actually managing projects.
    - Sales folks do not know what to sell.
    - Pre-Sales Engineers do not know which piece of equipment can interop with what (I'm talking Nortel equipment, not other vendors equipment).
    - Contract Management has to order, ship and track thousands of PEC codes manually and do not expect this invoice to match the sales initial proposal.
    - Customer Facing Finance folks cannot collect because they have to ask PM, Engineering, Contract Management and Sales to reconcile the PEC code mess, before they are able to collect a penny from the Customer.
    See my point? How much energy is spent in useless activities?
    One day, a visionary called Chahram Bolouri wanted to "subcontract" the problems, I mean, the supply chain to Flextronics. Total disaster.
  • felixmk
    I thought Hackney fixed this when he ran operations? ;-)
  • LonelyOpsGuy
    You know...During his first Sales Conf, when he went up that stage in Las Vegas saying that he would substantially reduce the 55,000 PEC codes in Nortel's systems, I actually believed him.
    And let's be honest here. This catastrophic event is not all Mike Z's fault, is it? Things started to fall through the cracks when Frank Dunn, a finance guys with no tech vision whatsoever, took the helm, wasn't it? One could blame the tech bubble, but Nortel for sure would be in a much better shape today if we had a tech guy with vision in the top ranks and not a finance guy, or an admiral and so forth and so on.
  • NTengineer
    Well said. I completely agree.
  • less
    Don't forget to minutely track every consumable needed for installation, too.
    Scenario: In the midst of all this nit-PECking the ATCA is finally tinstalled, powered up, the controller card inserted, and - oops. The latch breaks.
    Bummer - cuz the latch is supposed to depress the so-called non-latching, or push switch, that, only when depressed, of course, allows the card and subsequently the shelf to power up.

    Oh well, scan the card back out for repair. And just scan another card in. Uh, do we have another card? Well lets scan the database and see.... Thats what its for.

    Hmm. The latch on the new guy is loose and jiggles. Check out the flickering power indicator light! But it should do....

    So, how and when does word get back to whomever that their latches aren't all that great?
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