Friday, January 30, 2009

Nortel: Perspective Drives Feelings

A couple weeks ago, Brad Reese wrote a blog entry over at Network World that talked about the Nortel bankruptcy. In response, he got a bunch of comments from ex-Nortel employees discussing the reasons for Nortel's failure. Brad even quoted a couple of paragraphs from my previous blog posting on the subject. Last evening, Brad posted a roundup of some of the comments to his previous posting (including my quotes again).

What strikes me about the comments posted to Brad's original blog entry, as well as the comments I have received on my posting are that a lot of how you feel about this whole thing depends on your history with the company. There is a lot of "he said, she said" going on between old-line Nortel people and folks that came to Nortel through the Bay Networks acquisition.

If you were an old-line Nortel guy, then it's clear that the Bay Networks acquisition was the start of the screw-up. If you were a Bay Networks guy, then you probably feel that Nortel was clueless and didn't learn anything from the acquisition. Almost by definition, we're conditioned to think that the "home team" is better than the "visiting team," even when we're all supposed to be on the same team.

Fortunately for me, I was neither a career Nortel or Bay employee. I had only been at Bay for year before Nortel bought Bay. Because I was a relative newcomer to both companies, I think I have a better perspective on both the strengths and weaknesses than many other people. In this case, I think my perspective provides a distance necessary to make some objective judgements about the situation. That said, I'm just one person with one view. Everybody is entitled to their own.

So, did Bay screw up Nortel, or did Nortel screw up Bay? Short answer: Yes. The longer answer is more complicated.

When I got acquired into Bay, the company was pretty screwed up. Not many people know this, but when Bay was created from the merger of Synoptics and Wellfleet in the mid 1990s, the combined entity was actually larger than Cisco in terms of revenue. The company had a great set of Ethernet hubs, was leading in terms of the new technology of Ethernet switching, and a long-established line of excellent routers. In short, Bay took two great companies and jammed them together in what should have been an awesome company. Why did it work out that Cisco is thriving and Bay got bought out and Nortel then filed Chapter 11?

The problem, again from my perspective arriving at the company years later, was that the companies merged rather than one acquiring another. In talking with people who lived through it on both sides, this seems to be the root of all the other issues. The leadership of the companies went out of their way to try to make people feel that neither company had "conquered" the other. The problem with that was that it tied the decision-making process in knots. The leadership set up such a system of power sharing that nobody had any power to get anything done without another group being able to torpedo things. So, everybody started torpedoing everything in retaliation to being torpedoed themselves. At a macro level, almost all new product development ground to a halt because nobody could get enough critical mass to move the ball forward. Projects would start and then get repeatedly canceled.

This problem particularly devastated the Wellfleet product lines. Synoptics was very much bought into the idea that Asynchronous Transfer Mode (ATM) was THE NEXT BIG THING. ATM, it was said, would obsolete Ethernet and obsolete routing. While Synoptics wasn't the only company to believe this, they made big bets in this direction. Anybody advancing a project plan that focused on advancing the company's Ethernet switching (in which, again, Synoptics was leading) or routing product lines was often doomed to failure as budget was redirected to work on ATM-related projects. I talked with multiple Wellfleet engineers who had worked on five or six projects since being part of Bay, all of which had fallen victim to the budget redirection axe and been canceled in favor of "ATM will make that obsolete" thinking. But it wasn't just Wellfleet people. I met many Synoptics engineers trying to push forward Ethernet switching projects that suffered the same thing.

So, when I got to Bay, you had a bunch of fairly talented, but bitter people, all mad at each other, and almost no new product development coming to fruition. The sales force was desperate for something, anything new that it could sell.

During that same period, Cisco took a more pragmatic approach. It placed bets on each of these technologies, building what it could and signing OEM relationships to fill in the gaps. The Cisco marketing organization provided the "marketecture" that made everything look seamless and integrated, at least in the Powerpoint slide decks that were presented to customers in the Executive Briefing Centers ("...and of course all these various products run IOS..."). Then, Cisco watched the market and doubled-down on the market segments that were really growing. While Bay dallied with the notion that ATM was the one network to rule them all ("...and in the darkness bind them..."), Cisco quickly figured out that ATM wasn't selling and Ethernet switching and IP routing were. Appropriate projects were created to drive those product lines forward. Investments were made and profits ensued.

Now, Nortel was equally screwed up, but in a different way. Nortel was a great example of a company that did really well in the 1980s but didn't react to the way the world was moving in the 1990s. The company built great phone systems, both for private businesses (Meridian) as well as telcos (DMS). And when I say that they built them, they really did. They developed their own CPUs, wrote their own operating systems, manufactured all the boards and sheet metal and whatnot. This was old-line, vertically integrated manufacturing at its best. And it carried all the costs associated with such.

Further, Nortel really understood the voice market of the 1980s when things were still dominated by the larger telcos, many still nationalized around the world. These customers moved slowly. Products were installed and then expected to run for a decade or more, with nothing but backward-compatible upgrades provided during that time. Margins were very high. Everything was wonderfully over-engineered to deliver exceptional quality. The sales process was optimized to call on either large telcos (Bell Canada or the US Baby Bells) or work through oodles of small resellers peddling PBX systems for SMBs. This latter channel was highly optimized for installation and maintenance by unskilled labor. The rate of change was slow. In short, you built a highly engineered product, expected to be indestructable for a decade or more, and you leveraged your relationships to incrementally sell more upgrades into accounts that you won. You charged an arm and a leg for what you delivered, and it was very profitable. In that world, Nortel was very good.

Unfortunately, in the mid-1990s, the world changed. Nortel was woefully unprepared for the rise of datacom (not telecom), the Internet, and run-and-gun IT. In this environment, Nortel's slow-moving, vertically integrated development model fell apart. Just as the "Bell heads" lost out to the "Net heads" in the larger networking game, Nortel found itself on the diminishing side of the same war at the supplier level. In short, the world was going packet, and the packet world consumed and threw away more technology at a more rapid pace than Nortel had ever seen before.

In the mid-1990's, Nortel formed some relationships with Cabletron Systems in order to address packet-oriented product requirements. But this was not enough. John Roth, Nortel's CEO, knew that he needed a massive change that the corporate DNA level. Perhaps it was possible for a "Bell head" to morph into a "Net head," thought Roth, but it's obviously going to take longer than we have time for. Roth's decision to buy Bay was predicated on belief that Bay would infuse Nortel with a lot of good "Net head" DNA quickly. In this, I think Roth made a reasonable decision. Bay was still the #2 company in data, and could be afforded by Nortel at the time. You play the cards you're dealt, and in this respect Roth made a good move.

The problems came in trying to put it all together. Without an overarching vision of exactly how this merger of telecom and datacom companies was supposed to function, the whole thing got executed in a patchwork of small pieces. Roth knew he needed to shift the company, but couldn't articulate in detail to exactly where he was shifting. So everybody made their own best guess and the merged Nortel was the result.

Increasingly, the corporate marketing got more and more bland as the company tried to avoid taking a stand on anything to avoid angering a constituency. You couldn't tell new Meridian PBX customers that were expecting decade-long support that VoIP was the future and they had just bought an Edsel. You couldn't tell your channel partners that they had to understand both voice and data or they would be kicked out of the program. Etc. And so rather than anybody actually changing anything, Nortel operated like a slightly less disfunctional version of Bay, with everybody doing their own thing, with less sniping at each other. The cash generated by the optical business allowed people to avoid making the hard decisions about where the company was headed and allowed senior management to go to customers with the idea that Nortel made anything and everything, all equally well.

So, as a result, you have post-Chapter 11 comments like these from multiple points of view:

  • Nortel spin: "Bay was checkmated by Cisco, and for some strange and sad reason Nortel decided to follow Bay's losing managers and strategy, turning a once strong and proud company into an also-ran in the enterprise market." -- Really? Nortel followed Bay's strategy? All I knew was that Nortel kept trying to kill my product line. A product line that has since delivered billions in revenue to Nortel.
  • Nortel spin: "With the influx of Enterprise talent that were focused on short-term relationships, eventually everything went toward that strategy and away from strong, long-term relationships. As part of short term focused strategy, they outsourced their manufacturing, development and systematically "outsourced" of all of their valuable assets." So building everything from silicon on up is a good idea in an era when contract manufacturing works so well? A valuable asset?
  • Bay spin: "The Bay Networks aquisition was one of the best buys out of Roth's outrageous spending spree. The people were dynamic and products leading edge, providing a real alternative to Cisco in the enterprise space...which many customers loved." Bay's people were not dynamic and products leading edge. Certainly, there were good people and some good products, but many good people left Bay way before Nortel bought them because Bay was such a disaster, and many product lines had stagnated years earlier. Bay's people were tired and cranky, having put up with a bunch of internal crap for years, and the products were tired even if they had been market-leading when they were introduced. Things were turning around, but it wasn't all sunlight and roses.
  • Bay spin: "It was always perceived that Management was tinkering in product development as well. A product development life cycle would start, and then half way through be killed, and then re-spun. There was about 3 false starts on a IPT platform before one was actually released. Because of this, Nortel trailed Cisco and Avaya, and was never able to catch up." Right, not like those Bay engineers that had six projects canceled in as many years at Bay and literally never saw their hard work ship to customers in any form. Maybe Nortel did adopt some of Bay's failing strategies.

The point here isn't to suggest that anybody's recollections are wrong. This is simply a great example of the parable of the blind men with the elephant. We all saw a slice of the whole and form our judgements about blame based on our past history and our narrow vantage point. I assure you that there is more than enough blame to go around.

In any case, thanks Brad for pulling together multiple viewpoints. While we all can disagree about the cause, the fact that Nortel is now in Chapter 11 is fairly indisputable.


Blogger Der Doppelgänger said...

Dave: Thanks for the excellent post. One of the best I ever seen. Very analytical, straight to the point and without the biased passion that contaminates everyone nowadays.

Sat Jan 31, 05:15:00 AM 2009  
Blogger WD said...

Thanks for the post as well. Very well written and very well thought out.

Sat Jan 31, 07:37:00 AM 2009  
Blogger Andy Bryant said...

Hi Dave,

Spotted your blog through the great 'coffee' post above about Cisco's UCS announcement; then scrolled down to this one. Excellent summary of the history - and just as I remember it. I started at STC Telecommunications Labs in the UK (for less than a month), was then acquired into the Big Nerd Ranch, which later rolled back into Nortel. We used to work on a rough ratio of 1-3 projects out of 10 actually getting to the market.

Thu Mar 19, 01:44:00 AM 2009  
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