Thursday, January 15, 2009

Nortel: In Rememberance

Well, as might be imagined after yesterday's semi-shocking news that Nortel was filing Chapter 11 bankruptcy, the news stories are flying today about what this all means to the telecom industry.

Craig Matsumoto at Light Reading gets the "picture is worth 1000 words" award.

Jim Duffy at Network World reports that, unsurprisingly, competitors are already trying to chew what's left of the flesh off Nortel's "I'm not dead yet" corpse.

As a former Nortel employee, I can tell you that this was both surprising and not at the same time. The following is my analysis of things, having been at the company during its heyday but now from the outside looking in.

By way of background, I was with a small startup company, Rapid City, that got purchased by Bay Networks in 1997. Bay was then purchased by Nortel in 1998. Along the way, I was promoted to VP of product management for the enterprise switching group at Nortel. If you're familiar with the 8600 L3 switching platform, that came to become the core of the business we built, though I left just after the product shipped into the market in mid-2000, right before Nortel purchased Alteon Web Systems for $7.8B and the bubble burst.

In the telecom growth spurt of the late 1990s, Nortel was one of the fastest growing companies and stocks in the world. They were very well positioned to ride the optical networking hype wave that accompanied the Internet revolution and the overall building of the current worldwide network. Unlike many companies of that era, there really was a "there there." The company had real products, smart engineers, and in many cases very good technology. What they didn't have was customers with non-hyped business models and overall good business and marketing sense. In short, the bubble caught them, hook, line, and sinker.

Unfortunately, the company got very off-balance as it grew. It was very clear when I was there that anybody who wanted a long term career in Nortel had to be associated with the carrier group, preferably an optical product line. That was where all the momentum was within the company. If you were an employee working on other things (enterprise products in my case), it was clear that you weren't going to get any of the investment, attention, or promotions. In contrast, the optical management teams were masters of the universe.

When the bubble burst in late 2000/early 2001, the company's "core businesses" were smack in the middle of the action (or sudden lack of action, really). With the chair suddenly pulled out from under it, Nortel could not retrench quickly enough. They had allowed many of their other businesses to decay as the company got tunnel vision with all-things-optical, and there was nothing to fall back on. This was not the beginning of the end, but rather the end of the beginning, however.

If the company had had good leadership at that point, it could have gone through the painful process of rebuilding itself and survived. Products and product lines come and go, but good companies survive the dips and swings in the market. Unfortunately, Nortel didn't have the top-level DNA necessary at that point to do what was required and move the company forward. Many of the people who were in senior leadership roles at that point had simply been lucky to be at the right place at the right time during the bubble and found themselves unable to cope when the formerly rising tide stopped lifting all boats and instead started to recede. All big companies suffer this same problem, but Nortel suffered particularly hard because its success in the late 1990s had been so sudden and great.

The real trouble, the beginning of the end, started when accounting problems cropped up in 2002 and the company was not able to quickly move past them. They went through a couple of CEOs and CFOs during that time, some of whom later had criminal charges filed against them. While it would be hard to say that Nortel was fully "cooking the books," somebody at Nortel was clearly "warming them in the microwave." During the same time period when Enron, Tyco, and Worldcom were exploding, it was simply unacceptable to any investor and the company's stock continued to move downward as the scandal dragged on and on.

Just when you figured it would end, that Nortel would restate their earnings, and that they could get back to making good products again, instead the company would issue another press release saying that the final restatements were being delayed and there might be more bad news coming. This continued literally for years and was a constant drag on the company.

The constant bad news turned into a general malaise during this period. Instead of the vibrant company Nortel had been in the late 1990s, it became a dead man walking. The bad news affected customer confidence in the company, which led to even lower sales than they would have had in the post-bubble period, which led to layoffs and corporate debt to manage the finances, all of which in turn led to employee dissatisfaction, and attrition of good people.

So, here we are in 2009 and the chickens finally came home to roost. Just yesterday, Nortel filed for Chapter 11 bankruptcy protection in the US (and the equivalent in Canada). The luster came off Nortel back in 2001 and it's been a slow decline ever since. With the overall worldwide macro economy now faltering, Nortel simply couldn't balance the books any longer. Revenues were declining, the debt load was high, and there was very little that they could sell off that would raise cash, in spite of trying.

To be fair to Nortel, this really isn't the end. Chapter 11 bankruptcy simply protects a company from its creditors while it restructures itself under the watchful eye of the court to try to find a way to dig itself out of a very big hole. Some companies have been through Chapter 11 multiple times and are still operating (Continental Airlines springs to mind). Obviously, Nortel has a fairly traumatic future in front of it, but there is a chance that it will come back from this. If so, my own feeling is that it will be years before it finds it stride again.

If there's a lesson in this sad story for people, it's that good companies get through bad news fast. While every company has ups and downs, the good ones know how to manage through periods of bad news and do their best to get things behind them quickly. Nortel, in contrast, managed itself slowly into mediocrity.

Was everything at Nortel bad? No, certainly not. Nortel had many bright spots over the years, and I met some very talented people that I respect greatly from among the oldline (non-Bay Networks) employees. In short, there was real talent there. If there was a failure at Nortel, it was the leadership who didn't know how to handle the transition.

At this point, let me give some props to John Chambers over at Cisco. While Vyatta and Cisco obviously have big differences of opinion about how the networking market will evolve in the future, I'll say that the Cisco management team, led by Chambers, didn't fall into the same pot-holes as did Nortel following the bubble. Fundamentally, Cisco was better positioned than Nortel when the bubble burst. It was not as dependent on the optical networking product lines (because it was behind, a Nortel employee might say) and it was on the right side of the VoIP transition, with no legacy business to defend and migrate (Meridian). Still, Cisco out-executed Nortel through the post-bubble era. Cisco infiltrated Nortel's customer base, picked off key Nortel employees, and grew revenue even as Nortel declined. When the market gave them lemons, Cisco made lemonade. In my opinion, the credit for this rests with squarely with Chambers and his management team.

One question the networking pundits are starting to ask is, "Who's next?" Alcatel-Lucent has been troubled in recent years and has been laying off employees. Cisco is certainly not invincible and many of the top management team who steered the company through the post-tech-bubble period have left in recent years. Could another mega-networking company become a victim? Quite possibly, says I.

The current global recession will test everybody, I think, and we'll see who is strong enough to make it. Certainly, at Vyatta we think we'll continue to grow. While recessions aren't fun, it sometimes takes a large shock to the system to get people to reevaluate their behavior. In the same way that Cisco was on the right side of the transition to VoIP, Vyatta believes we're on the right side of the coming commoditization of networking.

While the future is never certain, Vyatta won't be filing Chapter 11 ourselves this week.


Anonymous Mike said...

Excellent review Dave, agree 100%!

Wed Jan 28, 09:58:00 AM 2009  

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