Monday, July 11, 2016

No Fear: Tales of a Change Agent

Having worked at Nortel years ago, I was interested enough to read Tim Dempsey’s book, No Fear: Tales of a Change Agent, mainly for its alternative title, or Why I Couldn’t Fix Nortel Networks! I was hoping to get more insight into the causes of Nortel’s demise. Too many other accounts focus on Nortel’s final years when little could have been done to save the company. I was hoping for more insight into what went on in the final years of the tech bubble ending about the year 2000.

Unfortunately, the book only makes passing references to the excesses of that period when Nortel made a number of choices to please analysts and keep its stock rising. Nortel hired indiscriminately to meet growth expectations and describe itself as having “over 90,000 employees worldwide.” It also grew through numerous acquisitions. But likely the most damaging activity came from trying to meet revenue and profit expectations. Nortel built billions of dollars’ worth of telecom equipment and shipped it to “customers” who had little expectation of ever paying for it. This gave apparent immediate profits but ultimately led to enormous financial losses from which the company never recovered.

This book is primarily about Dempsey’s career in human resources at Nortel. He believes that Nortel’s “colossal collapse” came because he “was unable to effectively change the leadership system.” I doubt that a better management style would have saved the company. The top level of the company made conscious decisions to boost the stock in the short term to the detriment of Nortel’s long-term health.

In the Preface, Dempsey describes Nortel in September of 2000 as “soaring” with “$30 billion in sales.” Unfortunately, in later restatements, Nortel admitted to losing tens of billions of dollars in the early 2000s. All was not how it seemed before the bubble burst.

In discussing poor acquisitions, Dempsey explains that “an HR exec did some research on specific acquisitions that we made and discovered that we had never met the business case of a single one.” But I bet the stock price went up anyway.

At a Nortel executive leadership forum in 2000, “a long-term career Nortel employee ... gets up and expounds ‘The market’s not as big as marketing says it is; I don’t believe the numbers.’ ... he was no longer seen as a ‘team player.’” Sadly, being a team player in this case means helping to prop up the stock price by not pointing out obvious truths.

At one point Dempsey describes a conversation between a business unit CFO and a corporate executive. The CFO wanted approval for a “deal that would land a big order if we were willing to finance the whole package.” The word “finance” in this context is a euphemism for shipping equipment to a customer who would never pay and pretending the “deal” is profitable. Dempsey explains: “financing of deals led to a lot of pain. We need top line growth, so we find someone who is willing to take our money to buy our equipment, thereby driving up our forecasts and, at the time, our stock price. Many of these customers did not have established business models or track records, and some were never able to pay off these bills.”

At one point Dempsey refers to “accounting mishaps.” This is a very generous way to describe false financial statements. It may not be possible to prove anything about Nortel’s intent at the time, but it is naive to think that these were just inadvertent mistakes.

For anyone who has ever played buzzword bingo, one particular sentence in the book sticks out: “we led many projects, seeking numerous objectives, hopefully synergistically and reinforcing in a systemic way, to steer us to some tipping point that would make the change inevitable.” This sentence is a good reminder that the book is primarily a story of Dempsey’s career in HR and only small parts are directly related to Nortel’s business activities.

As the tech bubble inflated and the value of stock options held by executives grew astronomically, Nortel did what was necessary to keep its stock price rising. It hired recklessly, made acquisitions, and built billions of dollars’ worth of telecom equipment and sent it to “customers” who would never be able to pay for it. Dempsey thinks the problem was leadership style and other commentators think the important mistakes were made in Nortel’s later years. Why do we need to search for subtle problems within Nortel when its actions during the tech bubble were more than enough to destroy the company?


  1. The day we hired the guy who was working on the fry grill in the cafeteria as a tester (with no experience), was the day I knew we were heading for a big fall. Synergistically the bimodal state of the tech world impugned the leadership paradigms at the core of the business (top that! yes I heard that in a meeting too).

    1. @Alan: I was worried when Nortel hired some people to write English documentation, but they couldn't speak much English and certainly couldn't write in English.

  2. I agree that Tim Dempsey's book doesn't put its finger on the actual root causes, but I also think you're being a little bit loose with your criticism...and haven't put your finger on it either. Let's think it through,...It's 1999 and every operating company is making money hand over fist, every equipment company is making money hand over fist, and rightly or wrongly, it has been accepted that internet traffic is doubling every 6 months. All the players believe this and operators are buying equipment accordingly. Equipment vendors are stretching to provide generous offers to outbid their competition and get a larger piece of the abundant pie and in doing so are offering financing terms. Those that are not taking aggressive action, are getting less of the share and are being criticized for not being aggressive enough. The industry is demanding additional employees at all levels which must come from outside the industry.. because there is already full employment within the industry and that means they are by definition less qualified. Then in 2001 - the crash happens. The industry realizes that there is significant (or massive) overbuilding, (no need to be overly suspicious, it happens all the time with condos) Projects that were previously thought to get to fruition in the 2001 to 2006 timeframe are then recalibrated for 2015, 2020, 2030 (i.e. not in our lifetime) THEN the acquisitions look blatantly irresponsible and THEN the aggressive offers of financing and other start to look irresponsible.. Its only with hind-sight that you can argue that the "deals" would never be paid for and that certain acquisitions may have been "blatantly irresponsible" even though many would not have the stomach for the vagaries of acquisitions at any time. We all love to criticize the buying of companies with no sales..But just turn on Shark Tank or Dragon's Den or read the news from Silicon Valley and see how many of the VCs allow an overblown evaluation to creep through or a company that has a promising product but doesn't have any sales to get funded or acquired. What would they have done without the acquisitions - had more cash on hand. Prolonged the agony for a couple more years.. For root causes, we should look into Nortel's fit with the market dynamics after the crash - how did companies compete after 2004, in what areas, with what expertise (resources) .. what about the new chinese competitors, and what were they doing or not doing to fit into that new world. Did they just do nothing and wait? Preoccupied by accounting scandals. We should avoid questions of irresponsibility, low integrity and conspiracy cause you'll need a new conspiracy theory for each company that bit the dust.. and there are hundreds that were affected. When the whole herd goes over a cliff, the root causes are unlikely to be company specific.

    1. @G Lemon: Whether or not Nortel's management should have known that their actions in the period up to 2000 would damage the company, it was these actions that did the serious damage. Dealing with the huge losses and trying to sort out which employees to keep in the aftermath was an enormous job, one with little hope for success.

      It's true that it's easy to use 20/20 hindsight. It's difficult to look back at individual decisions and decide whether they made sense given what was known at the time. But it's also true that Nortel and other companies at the time took some actions they knew were bad for their companies in the long run but good for keeping their stocks rising in the short run (and good for enriching themselves).

      No conspiracy theory is required here. People will do what's necessary to keep their jobs and make more from their stock options. During normal periods, these actions are somewhat positively correlated with the long-term success of a company. During the tech boom, the correlation went negative.

      Warren Buffett once explained how during certain periods of time insurance companies compete for market share to such an extent that they write business at unprofitable premiums. They largely know they are harming their companies' long-term health but cling to the excuse that everyone else is doing it too. And in the end, some of them end up out of business. What happened to Nortel was more complex, but not much different.

  3. Dude, you’re falling into the trap of trotting out the usual suspects of management corruption, greed, lining their pockets, getting away with murder, etc. Everyone is pretty much beating up on the banks these days with the same narrative – it goes down easy.. Throw in a few superficial statistics (like profitability numbers without backing out extraordinary items) and make a case for how bad things were. People love to read about scandal, but it doesn’t teach us anything from a business case perspective,.... for the next daring and ambitious enterprise – in fact it makes everyone stay home and not stick their necks out.

    I assume you went to business school. If this were a business case, it would be classified under the heading of “managing boom and bust” – plain and simple. A buildup to overcapacity followed by a shakeout. In the shakeout lots of companies went bust. Lots of companies that were doing the best they could. Beyond that you need to look at which competitors survived the shakeout and what their strategies were, who bet on which horse in the aftermath; how did the competitive and customer environment change, who merged with who, who went bankrupt, etc.

    And its still going on. The most recent merger (Alcatel-Lucent with Nokia or Nokia Siemens) was being discussed as recently as 2015.

    Personally, it looks to me like the winners were those who focused on wireless (e.g. Ericsson, Huawei and Nokia) and/or managed to survive by merging or getting bought. But the discussion should be all about strategy during the shakeout, market size and evolution, the introduction of Chinese competition, merging of the computer and telecom industries (Cisco), etc… and not about how management was lining their pockets and they are a bunch of bad guys..

    The fact that a witchhunt for corruption was held in Canada in the aftermath is a distracting factor – distracting management from the turnaround / situation at hand. To my knowledge all claims of wrongdoing have been dropped – and the allegations were made without basis, from one US accountant – For cases of wrongdoing with convictions, check out the Worldcom story.

    Also check out the University of Ottawa Business School analysis… Its not perfect, but it hits quite a few good and constructive points and it appears to be a living document that’s getting better all the time.

    1. @G Lemon: Disagree. Just one decision would have easily saved Nortel: don't provide customer financing. Only ship equipment to customers who can get 3rd party financing. It's hard to tell whether the motivations of management were a misguided attempt at grabbing market share, but like other companies at the time, they were motivated to keep their stocks rising. It's better to focus on market share among customers who actually pay.

    2. @G Lemon: The U of O analysis contains the following telling paragraph:

      "Nortel did achieve rapid revenue growth between 1997 and 2000, doubling its revenues in that time period while its stock price tripled. However, the rapid increase of physical and human resources led to an increase in overhead and duplication. Moreover, as the company reacted to the emergence of Internet technologies and to the opportunities presented by the dot-com boom, it embarked on an acquisition spree. This approach proved to be a failure because ill-chosen and poorly integrated acquisitions de-focused and over-complicated the organization. The company’s high cost structure and lack of financial discipline eventually led to financial ratios that were among the worst in the industry. While other players in the industry earned profits during this period, Nortel incurred repeated losses."

      In later restatements, this period proved to be disastrously unprofitable. The bulk of the damage was done by 2000. Most Nortel critics focus on later years when they struggled to fixed the problems created by 2000. The same is true of the criminal fraud case, focusing on a period after the damage was done.