‘Nortel did not need to die’: Ten years since the collapse that shook Ottawa’s tech sector

nortel
A view of a Nortel lab. (Photo by Etienne Ranger)

Almost exactly a decade after Nortel Networks filed for bankruptcy protection, Jonathan Calof still can’t help but wonder what might have been.

“It didn’t have to happen,” the professor at the University of Ottawa’s Telfer School of Management told OBJ in an interview last week. “Nortel did not need to die. That’s the bottom line.”

Ten years ago today ​– Jan. 14, 2009 ​– the company that was once the darling of Ottawa’s technology sector filed for bankruptcy protection in both Ontario and the United States, one day before it was slated to make a $107-million interest payment on its debt. Just a few months later, in June 2009, Nortel’s shares – once worth more than $124 – were delisted by the Toronto Stock Exchange.

The telecom giant’s collapse created ripple effects that are still being felt throughout the capital city, and the broader Canadian tech ecosystem, today.

"Nortel did not need to die. That's the bottom line."

Ottawa’s economic engine

The engine of the Ottawa tech community at its peak, Nortel gradually faded into oblivion, parcelling out its assets and selling them off to competitors such as Ciena, Ericsson and Avaya.

Its massive 370-acre former campus on Carling Avenue, which once housed half of Nortel’s 16,000 employees in the National Capital Region, now belongs to the federal government and will soon be home to the Department of National Defence headquarters. Many of those workers went on to launch companies of their own or help firms such as Ciena, Huawei and others lay the foundations for emerging technology such as 5G networks, the next generation of high-speed mobile communications infrastructure.

“Nortel had the best minds and Nortel had the best culture,” Calof said, yet none of it was enough to save the company.

Five years ago, the U of O academic led a team of researchers who interviewed 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.

Their report concluded that 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. Five years later, Calof says Nortel’s failure is still difficult to wrap his head around.

“I’m not blaming anybody,” he said from his office at uOttawa’s downtown campus. “It’s not that simple.”

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Nortel Networks' Carling campus in April, 2009. Photo by Iouri Goussev via Flickr.

Decision-making failures

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 found.

Nortel’s R&D department was renowned for pioneering cutting-edge technology such as the digital switch in the 1970s and ’80s. But because the firm 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.

Nortel brass also erred by splitting the growing enterprise into various divisions and decentralizing R&D, the researchers concluded, creating 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 study concluded. Instead, Nortel switched to “crisis management” mode, focusing on cutting costs rather than responding to market demands.

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.

The market decides who lives and who dies

While filing for bankruptcy protection made sense at the time, it sent a chilling message to customers who weren’t sure the company would survive to make good on its contracts, Calof says today.

“The reality is that Nortel died when their key customers in the U.S. and Europe weren’t buying from them,” he said. “I don’t care how rich you are or how powerful you are, it’s the market that decides whether you will succeed or fail, period. The customers lost faith. It’s very sad.”

While many of the firm’s former employees put their skills to work at other ventures or their own startups, Ottawa’s tech community has never fully recovered from the loss of its “anchor,” Calof added. Overall employment in the local sector has yet to return to its levels of a decade ago, and though the region has begun to make a significant mark in emerging fields such as autonomous vehicles, it’s not a world leader in any of them.

“We lost such an extraordinary asset,” he said.

Nortel’s demise hit home for Calof on a more personal level as well.

“I had two cousins who worked at Nortel, a husband a wife, both lost their jobs. Both lost their pensions. This is a disaster and it breaks my heart. I saw it. I felt it.”

When he announced the results of his study in 2014, Calof said he hoped its conclusions would serve as a lesson to other Canadian tech firms about the dangers of growing complacent and losing touch with their customers. Yet he says fewer than a handful of companies ever approached him about discussing the report’s results with their management teams.

“Nobody seemed to care to talk about what caused failure,” he said. “It didn’t have the traction. You kind of shake your head.”